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    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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    https://brainmass.com/business/accounting/post-addresses-distribution-practice-question-481183

    SOLUTION This solution is FREE courtesy of BrainMass!

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

    The correct answer is B because the dividend is based on the fixed percentage amount at purchase and common shareholders are called residual claimers. The 20,000 paid to preferred reduces E&P to 5,000 (25000 - 20000). The 5,000 goes to common shareholders with 5,000 being return of capital to equal the 10,000.

    The correct answer is B.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    © BrainMass Inc. brainmass.com December 24, 2021, 10:29 pm ad1c9bdddf>
    https://brainmass.com/business/accounting/post-addresses-distribution-practice-question-481183

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