Emma Is the Sole Shareholder in Pacific Corporation and Has

question 82

Essay

Emma is the sole shareholder in Pacific Corporation and has owned the stock for five years.The basis in her stock is $50,000.Pacific distributes $35,000 to Emma.Accumulated earnings and profits at the beginning of the year equal $25,000 and current earnings and profits equal $5,000.
Required:
a.What are the tax consequences of this information?
b.What are the tax consequences of this information if,instead of distributing $35,000 to Emma,Pacific distributes $100,000 to Emma?

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Definitions:

Activity Rate

The predetermined overhead rate used in activity-based costing to allocate costs to products or services based on specific activities.

Activity-based Costing

A costing method that assigns costs to products or services based on the activities they require.

First-stage Allocation

The initial process of assigning overhead costs to different departments or cost centers in a business based on relevant criteria.

Plantwide Overhead Rate

A single overhead absorption rate used throughout a factory or plant for allocating overhead costs to products.