[ocarina]

Bridge, a C Corporation had 15,000 in accumulated earnings and profits at the beginning of the current year. During the current year, Bridge reported earnings and profits of $10,000 and paid $20,000 in cash distributions to its shareholders in both March and July. What about of the July distribution should be classified as dividend income to Bridge’s shareholders?

a. 15,000

b. 10,000

c. 20,000

d. 5,000

I have an answer but it isn’t copyable.

I’m hung up on how 40,000 is the denominator for total distributions. How does that mathematically work out? Can someone help me think through this process?

FAR - 78
AUD - 82
REG - 79
BEC - 78

Study Materials: Becker Self Study, NINJA Notes, NINJA MCQ for review
Started March 2015 and finished December 2015 all on first attempt. Licensed CPA Jan 2016.

IT Auditor/CyberSec Consultant in Public Accounting
Future goals: Learn IT Network infrastructure, obtain CISA & CISSP

[Anonymous]

Distributions are taxable(dividend) to the extent of E&P available. You have a total of 25,000 E&P for the year.

The two distributions will be clasiffied like this:

1)20,000 from March = Dividen distribution.

25,000 E&P

– 20,000 distribution (dividend)

= 5,000 E&P left

2) 20,000 from July = 5,000 Dividen distributions and 15,000 return of capital(non taxable)

5,000 E&P

-20,000

= 15,000 return of capital bc there were only 5,000 E&P left. The other 5,000 are dividen distributions and therefore taxable.

[Anonymous]

Hope that helps.

[ocarina]

Thank you!!!! That helped a ton. Their explanation was total garbage and I also realized how to do it on similar questions that explained it better. That really bothered me!!

FAR - 78
AUD - 82
REG - 79
BEC - 78

Study Materials: Becker Self Study, NINJA Notes, NINJA MCQ for review
Started March 2015 and finished December 2015 all on first attempt. Licensed CPA Jan 2016.

IT Auditor/CyberSec Consultant in Public Accounting
Future goals: Learn IT Network infrastructure, obtain CISA & CISSP

[mabancroft]

I could be wrong here, but the calculation is a little more complex in that the current E&P is split pro rata. The answer works with that info give, but doesn't always.

Total E&P = 25K

May Distribution:

Pro Rata Current E&P – 5K

Accumulated E&P – 15K

July Distribution:

Pro Rata Current E&P – 5K

Return of Capital 15K

This is important because if the data given is all the same, except current E&P is only 5K, the calculation is as follows:

May Distribution:

Pro Rata Current E&P – 2.5K

Accululated E&P – 15K

Return of Capital – 2.5K

July Distribution:

Pro Rata Current E&P – 2.5K

Return of Capital 17.5K

The calculation as previously explained would incorrectly deem $0 of the July distribution as dividend income. That make sense?

REG: 90
FAR: 76
AUD: 88
BEC: 89

[Anonymous]

You are right, there is actually a pro rata basis calculation for distributions, I just saw the one line on REG Ninja book that said it. Although the result in taxable income in the END is the same, the calculation is necessary if we want to know what amount on each distributions is from current E&P and what amount is from accumulated E&P. If we use the MCQ above I think it would look like this:

Accumulated E&P – 15,000

Current E&P – 10,000

March distribution 20,000

July distributions 20,000

Pro rata basis = 10,000/20,000 = .50 This will give us a 5,000 current E&P per distribution.

March distribution

Total Distribution 20,000

Prorated Current E&P (5,000)

Accumulated E&P (15,000)

= 20,000 dividend distribution (taxable)

July distribution

Total distribution 20,000

Prorated Current E&P (5,000)

No accumulated left (0)

= 5,000 dividend distribution and 15,000 return of capital.

Also if we had a situation where we had a negative accumulated E&P balance and a positive current E&P balance that will give us a % of dividend distribution prorated in each distribution while having a negative accumulated E&P

[Anonymous]

Found more info in this publication:

https://www.irs.gov/publications/p542/ar02.html (CTRL + F distributions on the page)

[Author]

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