Question

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31.Smith Co. has no E&P, current or accumulated, prior to the following independent transactions with its...

31.Smith Co. has no E&P, current or accumulated, prior to the following independent transactions with its sole shareholder, Chris:

a.Distribution of LIFO inventory with a basis of $7,000, a FIFO value of $11,000, and a market value of $13,000.

b.Distribution of land with a basis of $21,000, a mortgage of $34,000, and a value of $58,000.

c.Sale of property to Chris for $20,000 (basis $5,000, value $25,000).

d.Does Chris have to recognize any income?

e.Does Smith Co. have any gains or losses?

f.What are the required adjustments to E&P?

Solutions

Expert Solution

Part A

Smith Co.’s recognized gain = $6,000 (fair value - basis = $13000-$7000 = $6,000)

Therefore,

E&P created = $6,000

Thus, Chris recognizes dividend income of $6,000

Then, E&P is reduced by $13,000 or $6,000 whichever is less, and it is $6000

This procedure will bring E&P = $0.

Part B

Smith Co.’s recognized gain = $37,000 (fair value - basis = $58000-$21000 = $37,000)

Therefore,

E&P (increased) = $37,000

Then, E&P is reduced by $5,000 (value - liability = $58000-$34000 = $24000)

This procedure will bring E&P = $13,000 ($37000-$24000 = $13000)

Chris has dividend income = $13,000

Part C

Smith Co.’s recognized gain = $20,000 (total amount of appreciation = $25000-$5000 = $20000)

Therefore,

E&P (inceased) = $20,000

Then, E&P is reduced by $5,000 (value – cash received = $25000-$20000 = $5000)

This procedure will bring E&P = $15,000 ($20000-$5000 = $15000)

Chris’s dividend income = $5,000 ( the amount of the discount).

ekkarill92 answered 1 year ago

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