Houghton Company Reports Negative Current E&P of $500,000 and Negative

question 60

Essay

Houghton Company reports negative current E&P of $500,000 and negative accumulated E&P of $800,000.  Houghton distributed $100,000 to its sole shareholder,Blossom Applegate,on December 31,year 1.Blossom's tax basis in her Houghton stock is $50,000.What is the tax treatment of the distribution to Blossom and what is her tax basis in Houghton stock after the distribution?

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Definitions:

Predetermined Overhead Rate

is an estimated rate used to allocate manufacturing overhead costs to individual products or job orders based on a specific activity base.

Finishing Department

The final stage in the manufacturing process where products are completed, packaged, and prepared for delivery.

Direct Labor-Hour

A measure of the work time spent by employees who are directly involved in the production process.

Manufacturing Overhead

The indirect factory-related costs that are incurred when a product is manufactured.