Does anyone know why in Regulation 3 Simulation 3 number 2 of Becker's software does it decide to prorate the current earnings and profits based on the amount of distribution at that date and not the number of months that passed in the year?
Here's the question:
Alaska, Inc. is an accrual-basis C corporation that was incorporated on January 1, Year 1. At the end of Year 2, the corporation is considering converting to an S corporation. Alaska is required to determine its accumulated earnings and profits prior to conversion. The company has already calculated book net income, taxable income, and prior-year accumulated earnings and profits, and is now attempting to calculate the company’s current earnings and profits.
In Year 4, Alaska is still a C corporation. Accumulated earnings and profits at the end of Year 3 were $61,000. Current earnings and profits for Year 4 are $24,000. During Year 4, Alaska made two distributions on the dates indicated in column A of the table below. Allocate the distributions indicated in column B among columns C, D, and E. Round all answers to the nearest dollar.
According to Becker, the first row is:
Date: 3/31/Y4
Distribution amount: $58,000
CE&P: $15,297
AE&P: $42,703
Excess: $0
They got the amount under CE&P by taking the total CE&P = 24,000 and multiplying it by 58,000/91,000, or in other words, the amount of distribution at 3/31 divided by the total amount of distribution in year 4.
The way I learned it in school is you take the CE&P = 24,000 and multiply it by 3/12 (6k), or in other words, the number of months that passed in the year at the date of distribution divided by the total number of months in one year. Then, you allocate AE&P in a FIFO way (61k-6k = 55k).
FAR - 86 (July 2014)
AUD - 85 (Aug 2014)
REG - 80 (Oct 2014)
BEC - 81 (Nov 2014)
I'm done!!!!
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