**Text:**LO.1, 3 At the beginning of the year, Penguin Corporation (a calendar year taxpayer) has accumulated E & P of $55,000. During the year, Penguin incurs a $36,000 loss from operations that accrues ratably. On October 1, Penguin distributes $40,000 in cash to Holly, its sole shareholder. How is Holly taxed on the distribution?**Explanation:**The text describes a scenario involving Penguin Corporation and its sole shareholder, Holly. It explains that Penguin Corporation began the year with accumulated Earnings and Profits (E & P) of $55,000. During the year, the corporation experienced an operational loss of $36,000, which accrued evenly throughout the year. On October 1, Penguin Corporation distributed $40,000 in cash to Holly.The question posed is how Holly will be taxed on the $40,000 distribution, considering the accumulated E & P and the operational loss the corporation encountered.

The amount of a payout to shareholders that would be considered to be taxed as dividends in a tax context is represented by the Earnings And Profits of a firm. Any extra distribution would be taxed as a capital gain or return on investment.Answer: Penguin's accumulated E&p is 55,000 and the loss for the year is 36,000 So penguin corporation will deduct 75% loss from the earnings of $55,000 which is 45,000-$27,000 So $28,000 will be taxed as dividends by Holly and the remaining $12,000 represents a return of capital. Note: As Penguin distributes cash on October 1 so 75% is taken.

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LO.1, 3 At the beginning of the year, Penguin Corporation (a calendar year taxpayer) has accumulated E & P of $55,000. During the year, Penguin incurs a $36,000 loss from operations that accrues ratably. On October 1, Penguin distributes $40,000 in cash to Holly, its sole shareholder. How is Holly taxed on the distribution?

LO.1, 3 At the beginning of the year, Penguin Corporation (a calendar year taxpayer) has accumulated E & P of $55,000. During the year, Penguin incurs a $36,000 loss from operations that accrues ratably. On October 1, Penguin distributes $40,000 in cash to Holly, its sole shareholder. How is Holly taxed on the distribution?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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