At a time when Blackbird Corporation had E & P of $700,000 and 1,000 shares of stock outstanding, the corporation distributed $300,000 to redeem 400 shares of its stock.The transaction qualified as a disproportionate redemption for the shareholder.Blackbird's E & P is reduced by $280,000 as a result of the distribution.

Question

Quizplus · Accepted Answer

A disproportionate redemption occurs when the redemption amount exceeds the shareholder's proportionate ownership of the corporation. In this case, 400 out of the 1,000 shares were redeemed, which is 40% of the outstanding shares. However, the redemption amount of $300,000 was 42.86% of the corporation's E&P of $700,000, making it a disproportionate redemption. The reduction in E&P of $280,000 is also correct since the redemption amount exceeded the shareholder's proportionate ownership.

At a Time When Blackbird Corporation Had E & P