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)
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.
Get Answers For Free
Most questions answered within 1 hours.