Pine Creek Company is owned equally by Bob and his sister Samantha, each of whom own 1,000 shares in the company. On December 31, 20X3, Pine Creek redeemed 200 of Samantha's shares for $5,000,000 in a transaction treated as an exchange by Samantha. Pine Creek has current E&P of $10,000,000 and accumulated E&P of $30,000,000 (computed without regard to the stock redemption). Assuming Pine Creek did not make any dividend distributions during 20X3, by what amount does the company reduce its E&P because of the redemption?
What will be an ideal response?
$4,000,000
Pine Creek reduces its accumulated E&P by the lesser of the cash distributed ($5,000,000) or the percentage of stock redeemed times accumulated E&P at the date of the redemption, after reduction by any dividends paid during the year (200/2,000 × $40,000,000 = $4,000,000).
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