Assume Lex Corp. reported current E&P of $40,000 and accumulated E&P was $16,000. On December 31,...
Assume Lex Corp. reported current E&P of $40,000 and accumulated E&P was $16,000. On December 31, Lex Corps distributed $48,000 to Jim and $16,000 to Tracey. What amount of dividend income do Jim and Tracey report, and what is accumulated E&P for Lex corp. at the beginning of the next year?
Homework Answers
Total earnings ( current and accumulated) available for distribution is $ 40,000 plus $ 16,000 = $ 56,000
Total distribution made = $ 48,000 + $ 16,000 = 64000
If the current year earnings is insufficient, the balance in accumulated earnings account can be used to distribute dividend
Distribution in excess of corporation's total earnings is treated as return on capital and not taxed as dividend income . Hence of the total distribution made , only $ 56, 000 will be treated as dividend distribution
Income to be taxed as dividend :
Jim : (48000/64000)* 56000 = $ 42,000
Tracey : (16000/64000)*56000 = $ 14,000
As the total available earning ( Current and accumulated) is distributed as dividend the balance in accumulated earnings account at the beginning of next year is nil
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