Starling Corporation has accumulated E & P of $60,000 on January 1, 2018. In 2018, Starling Corporation had an operating loss of $80,000. It distributed cash of $40,000 to Zoe, its sole shareholder, on December 31, 2018. Starling Corporation's balance in its E & P account as of January 1, 2019, is:
A) $60,000 deficit.
B) $20,000 deficit.
C) $0.
D) $60,000.
E) None of the above.

Question

Quizplus · Accepted Answer

Starling Corporation had E&P of $60,000 on January 1, 2018. However, it experienced an operating loss of $80,000 in 2018. This means that its E&P balance decreased to a deficit of $20,000 by the end of the year (i.e. $60,000 - $80,000 = -$20,000).

Since Starling Corporation distributed $40,000 to its sole shareholder Zoe on December 31, 2018, this distribution would further reduce its E&P balance to a deficit of $60,000 (i.e. $20,000 - $40,000 = -$60,000).

Therefore, the balance in its E&P account as of January 1, 2019, would be a deficit of $20,000.

Starling Corporation Has Accumulated E & P of $60,000 on January