Dividend entry liquidating
331, a liquidating distribution is considered to be full payment in exchange for the shareholder’s stock, rather than a dividend distribution, to the extent of the corporation’s earnings and profits (E&P).The shareholders generally recognize gain (or loss) in an amount equal to the difference between the fair market value (FMV) of the assets received (whether they are cash, other property, or both) and the adjusted basis of the stock surrendered.
This case study has been adapted from , 25th Edition, by Albert L. Dividend received by the holding company from its subsidiary out of pre-acquisition profits is treated as capital receipt; the journal entry for its record being as follows:—Dividend received from the subsidiary company out of pre-acquisition profits. Its effect on the holding company’s balance sheet is as follows;—Thus the holding company deducts the amount of dividend received out of pre-acquisition profits from the balance of shares in subsidiary company account. stood as follows: Illustration 7: The following are the balance sheets of H Ltd. as at 31st March, 2012: Illustration 8: The following are the balance sheets of Sun Ltd. as on 31st March, 2012: Illustration 9: From the following balance sheets of H Ltd. and the additional information given thereafter, prepare consolidated balance sheet of H Ltd. as on 31st March, 2012: Additional information: (i) On 1st April, 2011 S Ltd.’s General Reserve and Profit and Loss Account showed balances of Rs 1,30,000 and Rs 1,26,000 respectively.(ii) In October, 2011 S Ltd. credited the dividend received by it to its Profit and Loss Account.(iii) Included in Creditors of S Ltd. On 31st March, 2010 half of these goods were lying unsold in S Ltd. 331 for the difference between the FMV and the shareholder’s basis in the stock).As a result, the tax consequences of a subsequent sale of the assets by the shareholder should be minimal. The corporation is treated as selling the distributed assets for FMV to its shareholders, with the resulting corporate-level tax consequences.
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If the stock is a capital asset in the shareholder’s hands, the transaction qualifies for capital gain or loss treatment.