In the Current Year, Pearl Corporation Has $300,000 of Current

question 9

Essay

In the current year, Pearl Corporation has $300,000 of current and accumulated E&P. On June 3, Pearl Corporation distributes a parcel of land (a capital asset)worth $120,000 to Betty, a shareholder. The land has a $60,000 adjusted basis to Pearl Corporation and is subject to a $16,000 mortgage, which Betty assumes. Assume a 34% marginal corporate tax rate.
a)What is the amount and character of the income recognized by Betty as a result of the distribution?
b)What is Betty's basis for the land?
c)What is the amount and character of Pearl's gain or loss as a result of the distribution?
d)What effect does the distribution have on Pearl's E&P?

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Definitions:

Trade Discounts

Price reductions granted by sellers to buyers in the commercial chain, often based on volume purchased or during promotional periods.

Financial Statements

Formal records of the financial activities and position of a business, individual, or other entity.

Raw Materials

Materials in their natural, unprocessed state used as inputs in production processes.

FOB Destination

A shipping term where the seller bears the shipping costs and retains ownership of the goods until they are delivered and accepted by the purchaser.