Exit Corporation Has Accumulated E&P of $24,000 at the Beginning

question 28

Multiple Choice

Exit Corporation has accumulated E&P of $24,000 at the beginning of the current tax year. Current E&P is $20,000. During the year, the corporation makes the following distributions to its sole shareholder who has a $22,000 basis for her stock. The treatment of the $15,000 August 1 distribution would be

• A) $15,000 is taxable as a dividend; $5,000 from current E&P and the balance from accumulated E&P.
• B) $15,000 is taxable as a dividend from accumulated E&P.
• C) $4,000 is taxable as a dividend from accumulated E&P, and $11,000 is tax-free as a return of capital.
• D) $5,000 is taxable as a dividend from current E&P, and $10,000 is tax-free as a return of capital.

---

Definitions:

Variable Manufacturing Overhead

Variable manufacturing overhead consists of production costs that fluctuate with the level of output, such as utilities and materials used in the production process.

Variable Overhead Rate Variance

The difference between the actual variable overhead rate incurred during a period and the standard variable overhead rate, multiplied by the actual activity level.

Variable Overhead Rate Variance

The difference between the actual variable overhead incurred and the standard cost allocated based on the actual levels of the allocation base.

Lubricants

Substances applied to reduce friction and wear between surfaces in mutual contact, often used in machinery and equipment to ensure smoother operation.