Question

Wildcat Corporation reports current E&P of negative $200,000 in year 1 and accumulated E&P at the beginning of the year of $100,000. Wildcat distributed $300,000 to its sole shareholder on December 31, year 1. How much of the distribution is treated as a dividend in year 1?

a. $0.
b. $100,000.
c. $300,000.
d. $200,000.

Answer 1

In year 1, Wildcat Corporation would treat $100,000 of the $300,000 distribution as a dividend, due to the availability of accumulated E&P at the beginning of the year and the negative current E&P.

Step-by-step explanation:

The amount of the distribution treated as a dividend for Wildcat Corporation in year 1 would be $100,000. This is because dividends are paid out of the current and accumulated E&P (Earnings and Profits). Since the current E&P is negative $200,000 and there's an accumulated E&P of $100,000 at the beginning of the year, only the accumulated E&P is available to be distributed as a dividend. Therefore, the distribution up to this amount ($100,000) is considered a dividend. The remaining $200,000 of the distribution is not treated as a dividend, and could potentially be a return of capital or capital gain.