This Year, the Zhao Estate Generated Distributable Net Income (DNI)

question 56

Multiple Choice

This year, the Zhao Estate generated distributable net income (DNI) of $100,000, one-fourth of which was tax- exempt interest, and the balance of which was long-term capital gain. Kyle Zhao, the sole income beneficiary of the estate, received a distribution of the entire $125,000 accounting income of the entity. How does Kyle report the distribution?

• A) $75,000 long-term capital gain, $25,000 exempt interest.
• B) $50,000 long-term capital gain, $50,000 exempt interest.
• C) $75,000 long-term capital gain, $25,000 ordinary income.
• D) $93,750 long-term capital gain, $31,250 exempt interest.

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Definitions:

Compounded

Refers to the process where the value of an investment grows exponentially over time as earnings or interest are reinvested to generate additional earnings.

Dividend Yield

A ratio indicating the amount of dividends a company distributes annually in relation to its share price.

Constant Growth Model

A model that estimates the value of a dividend-paying stock by assuming constant growth in dividends at a consistent rate.

Gordon Model

A financial model used to determine the value of a stock by considering the current dividend, the expected growth rate of dividends, and the required rate of return.