At the Beginning of the Year, Clampett, Inc

question 101

Multiple Choice

At the beginning of the year, Clampett, Inc. had $100,000 in its AAA, $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Inc.
Earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J. D. owns 25% of Clampett, Inc., his basis in Clampett, Inc. at the beginning of the year is $30,000, and his share of the distribution was $50,000. What is J. D.'s basis in the Clampett, Inc. stock after these transactions?

• A) $0.
• B) $5,000.
• C) $12,500.
• D) $15,000.
• E) None of the choices are correct.

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Definitions:

Liquidity

Measures the ease with which an asset can be converted into cash without significantly affecting its price.

Speculative Motive

The need to hold cash to take advantage of additional investment opportunities, such as bargain purchases.

Liquidity

The ability of an asset to be converted into cash quickly and without any significant loss in value.

Cyclical Activities

Economic or business activities that are affected by the ups and downs of the economy, showing a tendency to rise and fall in response to economic cycles.