Question
In: Accounting
ABC Corp (ABC) was formed 15 years ago by Able & Body (2 individuals). ABC uses...
ABC Corp (ABC) was formed 15 years ago by Able & Body (2 individuals). ABC uses the cash method of accounting and reports on a calendar year basis. A & B still own 100 shs each of the 200 shs of ABC. On 3/1 of the current year, ABC distributed $40,000 in total- $20,000 each to A and B, and 9/30 of the current year, ABC distributed $70,000 in total - $35,000 each to A and B. No other distributions were made by ABC during the current year.
Assume A's adjusted basis in his ABC shs is $26,000, B's adjusted basis in his ABC shs is 40,000.
Unless otherwise stated, assume that the figure for "a/e&p" is the "accumulated earnings and profits" (or defict) of ABC as of January 1 of the current year. Assume that's the figure for "ce/p" is the "current earnings and profit" (or deficit) of ABC during the current year. Treat each situation seperatley and characterize the distributions to A & B.
a) A/e&p is $50,000 and c/e&p is $40,000.
b) A/e&p is $0 and c/e&p is $45,000.
c) A/e&p is $(90,000) and c/e&p is $40,000.
d) A/e&p is $(55,000) and c/e&p is $(30,000).
Solutions
Expert Solution
| Particulars | Unit | Able | Body | Total | |
| Adjusted basis | $ | $ 26,000 | $ 40,000 | $ 66,000 | |
| Sharing | Shr | 100 | 100 | ||
| Sharing % | % | 50% | 50% | ||
| As on 1st March Distribution | 20000 | 20000 | 40000 | ||
| As on 30th Sept | 35000 | 35000 | 70000 | ||
| Assumptions - Profit/ Losss earned consistantly through out year. | |||||
| Both A & B sold their bais equal to get the equal Capital gain. | |||||
| A | A e/p is $ 50,000 and C e/p is $ 40,000 | ||||
| A e/p | C e/p | ||||
| As on 1st March Status was | $ | $ 50,000 | $ 6,667 | ||
| Distribution as dividend in Cash | $ (33,333) | $ (6,667) | $ (40,000) | ||
| Balance Status | $ 16,667 | $ - | |||
| As on 30th Sept | $ 16,667 | $ 23,333 | $ 40,000 | ||
| Distribution as dividend in Cash | $ (16,667) | $ (23,333) | $ (40,000) | ||
| Balance of A e/p and C e/p | $ - | $ - | $ - | ||
| Balance to be distributed on 30th Sept ( $70000-$40000 e/p) | $ 30,000 | ||||
| Distribution from ROE | Able | Body | Total | ||
| Adjusted basis | $ 26,000 | $ 40,000 | $ 66,000 | ||
| Balance from ROE | $ (15,000) | $ (15,000) | $ (30,000) | ||
| Balance Adjusted basis | $ 11,000 | $ 25,000 | $ 36,000 | ||
| B | A e/p is $ 0 and C e/p is $ 45,000 | ||||
| A e/p | C e/p | ||||
| As on 1st March Status was | $ | $ - | $ 7,500 | ||
| Distribution as dividend in Cash | $ - | $ (7,500) | $ (7,500) | ||
| Balance of A e/p and C e/p at 1/3 | $ - | $ - | $ - | ||
| Balance to be distributed on 1st March ( $40000-$7500 e/p) | $ 32,500 | ||||
| Distribution from ROE | Able | Body | Total | ||
| Adjusted basis | $ 26,000 | $ 40,000 | $ 66,000 | ||
| Balance from ROE | $ (16,250) | $ (16,250) | $ (32,500) | ||
| Balance Adjusted basis | $ 9,750 | $ 23,750 | $ 33,500 | ||
| As on 30th Sept | |||||
| Distribution as dividend in Cash | $ 35,000 | $ 35,000 | |||
| from ROE | $ (9,750) | $ (9,750) | |||
| from Capital profit on sale of Share | $ 25,250 | $ 25,250 | |||
| Balance Adjusted basis | $ - | $ 14,000 | |||
| C | A e/p is $ (90,000) and C e/p is $ 40,000 | ||||
| A e/p | C e/p | ||||
| As on 1st March Status was | $ | $ (90,000) | $ 6,667 | ||
| Distribution as dividend in Cash | $ - | $ (6,667) | $ (6,667) | ||
| Balance of A e/p and C e/p at 1/3 | $ (90,000) | $ - | $ (90,000) | ||
| No distribution from negative e/p | |||||
| Balance to be distributed on 1st March ( $40000-$7500 e/p) | $ 33,333 | ||||
| Distribution from ROE | Able | Body | Total | ||
| Adjusted basis | $ 26,000 | $ 40,000 | $ 66,000 | ||
| Balance from ROE | $ (16,667) | $ (16,667) | $ (33,333) | ||
| Balance Adjusted basis | $ 9,333 | $ 23,333 | $ 32,667 | ||
| As on 30th Sept | |||||
| Distribution as dividend in Cash | $ 35,000 | $ 35,000 | |||
| from ROE | $ (9,333) | $ (9,333) |
ekkarill92 answered 1 year ago