On December 1, Year 7, Gelt Corporation declared a dividend and distributed to its sole shareholder a parcel of land that was not an inventory asset. On the date of the distribution, the following data were available: Adjusted basis of land $ 6,500 Fair market value of land 14,000 Mortgage on land 5,000 For the year ended December 31, Year 7, Gelt had earnings and profits of $30,000 without regard to the dividend distribution. If the mortgage on the land was assumed by the sole shareholder, by how much should the dividend distribution reduce Gelt's earnings and profits

The amount by which the dividend distribution should reduce Gelt's earnings and profits is $1,500.

Explanation:

The mortgage on the land was assumed by the sole shareholder, the amount by which the dividend distribution should reduce Gelt's earnings and profits can be calculated using the following formula:

Amount of expected reduction in Gelt's earnings and profits = Adjusted basis of land - Mortgage on land (1)

Where;

Adjusted basis of land = $6,500

Mortgage on land = $5,000

Substitute the values into equation (1), we have:

Amount of expected reduction in Gelt's earnings and profits = $6,500 - $5,000 = $1,500

Therefore, the amount by which the dividend distribution should reduce Gelt's earnings and profits is $1,500.

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