Jerry is the sole shareholder of Bluejay Corporation,a calendar year C corporation.As of January 1,2012,Bluejay has a deficit of $50,000 in accumulated E & P.During 2012,it has current E & P of $300,000 and distributes a cash dividend of $400,000 to its shareholder.As of January 1,2012,Jerry's basis in the Bluejay stock is $75,000.One result of these transactions is:

Question

Quizplus · Accepted Answer

The distribution of cash dividend of $400,000 exceeds the current E&P of $300,000. Therefore, the distribution is considered a dividend to the extent of current E&P and the remaining $100,000 is treated as a return of capital.

Jerry's dividend income is equal to the amount of dividend declared which is $300,000 (current E&P).

As for choice (D), the deficit in accumulated E&P is not affected by the dividend distribution, it remains at $50,000 as it was at the beginning of the year.

Jerry Is the Sole Shareholder of Bluejay Corporation,a Calendar Year