Oreo Corporation Has Accumulated E&P of $8,000 at the Beginning

question 3

Multiple Choice

Oreo Corporation has accumulated E&P of $8,000 at the beginning of the current year. During the year (a nonleap year) , the corporation incurs a current E&P deficit of $18,250. The corporation distributes $11,000 on March 20th to Morris, its sole shareholder, who has a $9,000 basis for his stock. If the exact loss cannot be determined as of the date of distribution, the treatment of the distribution will be

• A) $11,000 return of capital.
• B) $4,100 dividend and a $6,900 tax free return of capital.
• C) $8,000 dividend and a $3,000 return of capital.
• D) $4,100 dividend and a $6,900 capital gain.

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Definitions:

Shutdown Decision

A short-run economic decision made by firms about whether to continue operations or shut down temporarily based on costs and revenue.

Marginal Cost Curve

A graphical representation showing the change in the total cost of producing one additional unit of a product or service.

Average Variable Cost

The total variable costs divided by the quantity of output produced, representing the variable cost of producing each unit of output.

Average Total Cost

The total cost of production (fixed plus variable costs) divided by the number of units produced, showing the average cost per unit.