General Inertia Corporation Made a Pro Rata Distribution of $50,000

question 23

Multiple Choice

General Inertia Corporation made a pro rata distribution of $50,000 to Tiara, Inc., in partial liquidation of the company on December 31, year 1.Tiara, Inc., owns 500 shares (50 percent) of General Inertia.The distribution was in exchange for 250 shares of Tiara's stock in the company.After the partial liquidation, Tiara continued to own 50 percent of the remaining stock in General Inertia.At the time of the distribution, the shares had a fair market value of $200 per share.Tiara's income tax basis in the shares was $100 per share.General Inertia had total E&P of $800,000 at the time of the distribution.What amount of dividend or capital gain does Tiara recognize as a result of the transaction?

• A)Tiara does not recognize any dividend income or capital gain.
• B)Tiara recognizes capital gain of $50,000.
• C)Tiara recognizes dividend income of $50,000.
• D)Tiara recognizes capital gain of $25,000.

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Definitions:

Management Expertise

the set of skills, knowledge, and experience that is required for effectively directing and controlling an organization.

Carrying Value

The value of an asset as shown in the business's account, which may differ from its fair market value, considering factors such as depreciation.

Straight-Line Method

An accounting method for calculating depreciation by evenly spreading the cost of an asset over its useful life.

Goodwill Impairment

A write-down of goodwill on the balance sheet when its carrying value exceeds the fair value, indicating that the asset is not as valuable as previously thought.