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This post addresses a distribution practice question.

A corporation that has both preferred and common stock has a deficit in accuulated earnings and profit at the beginning of the year. The current earnings and profits are $25,000. the corporation makes a divided distribution of $20,000 to the preferred shareholders and $10,000 to the common shareholders. How will the preferred and common shareholders report these distributions?

A) Preferred - $20,000 dividend income; common - $10,000 dividend income

B) Preferred - $20,000 dividend income; common - $5,000 dividend income, $5,000 return of capital

C) Preferred - $15,000 dividend income; common - $10,000 dividend income

D) Preferred- $20,000 return of capital; common - $10,000 return of capital

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B) Preferred - $20,000 dividend income; common - $5,000 dividend income, $5,000 return of capital

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Solution Summary

This solution gives the correct choice with explanation to the following multiple choice practice question:

A corporation that has both preferred and common stock has a deficit in accuulated earnings and profit at the beginning of the year. The current earnings and profits are $25,000. the corporation makes a divided distribution of $20,000 to the preferred shareholders and $10,000 to the common shareholders. How will the preferred and common shareholders report these distributions?

A) Preferred - $20,000 dividend income; common - $10,000 dividend income

B) Preferred - $20,000 dividend income; common - $5,000 dividend income, $5,000 return of capital

C) Preferred - $15,000 dividend income; common - $10,000 dividend income

D) Preferred- $20,000 return of capital; common - $10,000 return of capital

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