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Unformatted text preview: but none of the answer choices provide for capital gain distributions, so we have to
assume that the capital is in excess of the balance of the distribution after the current E&P is allocated.
Because preferred shareholders are paid first, the $20,000 paid to them reduces available current E&P to
distribute to $5,000 [$25,000 - $20,000]. The preferred shareholders are taxed on $20,000 of dividends.
The common shareholders would report $5,000 in dividend income (the remaining amount of current
E&P) and would have $5,000 in return of capital [$5,000 + $5,000 = $10,000 paid to the common
Choice "a" is incorrect. Please refer to the discussion above for choice "b". $20,000 is taxable to the
preferred stockholders as dividend income. However, there is not enough E&P to provide for $10,000 of
dividend income to the common shareholders. After the preferred shareholders are paid their $20,000,
only $5,000 of E&P is available for distribution as a taxable dividend. The balance of the...
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This note was uploaded on 06/14/2013 for the course ACCOUNTING Regulation taught by Professor Becker during the Fall '10 term at Keller Graduate School of Management.
- Fall '10
- The Land