Question

Badger Corporation had $64,000 of earnings and profits before accounting for the following distributions to its...

Badger Corporation had $64,000 of earnings and profits before accounting for the following distributions to its sole shareholder:

Cash $25,000

Real Estate: Adjusted basis 70,000

Real Estate: Fair market value 98,000

Real Estate: Subject to a mortgage of 40,000

The shareholder assumes the $40,000 mortgage on the property. Without considering Federal income taxes, what is the net reduction to Badger’s earnings and profits?

a. $55,000

b. $28,000

c. $68,000

d. $64,000

e. None of the above.

(Please explain)

Business   Accounting   
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Homework Answers

Answer #1

Option a - $55,000 is correct.

Explanation: Any asset distributed to shareholder is considered as dividend, be it in cash or non-cash assets. And these dividends are deducted in books of accounts at book value/adjusted book value. Here, $25,000 was given as cash. And real estate at adjusted basis for $70,000 with a liability of $40,000 (mortgage).

Hence, net deduction from earnings would be = 25,000 + 70,000 - 40,000 = $ 55,000.

Fair market value of the property would be used to be disclosed via notes to accounts.

Hence, option a is correct.

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