Gold Corporation has accumulated E & P of $2 million as of January 1 of the current year. During the year, it expects to have earnings from operations of $1,680,000 and to distribute $900,000 in cash to shareholders. Gold Corporation also expects to
sell an asset for a loss of $2 million. Thus, it anticipates incurring a deficit of $320,000 for the year. What can Gold do to minimize the amount of dividend income to its shareholders?
Gold should recognize the loss as soon as possible and immediately thereafter make the cash distribution. For example, assume these two steps took place on January 2 . Because current E & P is a deficit, accumulated E & P is brought up to date. At the time of the distribution, the combined E & P balance is zero [$2 million (beginning balance in E & P) – $2 million (existing deficit in current E & P)], and the entire $900,000 is a return of capital. Current deficits are allocated pro rata throughout the year unless the parties can provide otherwise. Here they can.
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