Orange Corporation generates current E&P of $40,000 and has accumulated E&P of $35,000 at the beginning of the current year.During the year, Orange makes a $120,000 distribution to its shareholders.Orange's accumulated E&P at year-end is negative.

Question

Quizplus · Accepted Answer

The accumulated E&P at year-end cannot be negative. It must be zero or positive. The calculation would be:

Beginning accumulated E&P: $35,000 
Current year E&P: $40,000 
Total E&P available for distribution: $75,000

However, the $120,000 distribution exceeds the available E&P, resulting in a deficit of $45,000. Therefore, the accumulated E&P at year-end would be zero minus $45,000, which is negative $45,000. But this negative balance would be carried forward to the next year and not reflected directly on the current year's E&P calculation.

Orange Corporation Generates Current E&P of $40,000 and Has Accumulated