Question

Bismuth Corporation has accumulated E & P of $50,000 on January 1, 2019. For 2019, Bismuth had an operating loss of $120,000. It distributed cash of $70,000 to Jimmy, its sole shareholder, on December 31, 2019. Bismuth’s E&P balance as of January 1, 2020, is:

a. $120,000 deficit

b. $70,000 deficit

c. $20,000 deficit

d. $0

e. None of the above

Answer 1

Solution:
	Statement of Earnings & Profit Balance
	AS on January 01, 2020
	Beginning Balance of Earnings & Profit	$               50,000
	Add: Net income (Loss) of the year	$         -1,20,000
	Ending balance of Earnings & Profit	$             -70,000
	This shows the deficit in Earnings & Profits of $ 70,000
	Answer = Option B = $ 70,000 Deficit
	Note:
	Cash distribution is not part of earnings & profit so effect of the cash paid
	Jimmy of $ 70,000 Is not taken in calculation of E&P balance