Question

Assume the following year 2 income statement for Johnstone Corporation, which was a C corporation in...

Assume the following year 2 income statement for Johnstone Corporation, which was a C corporation in year 1 and elected to be taxed as an S corporation beginning in year 2. Johnstone’s earnings and profits at the end of year 1 were $12,210. Marcus is Johnstone’s sole shareholder, and he has a stock basis of $48,500 at the end of year 1.

Johnstone Corporation
Income Statement
December 31, Year 2
Year 2
(S Corporation)
Sales revenue $ 184,000
Cost of goods sold (43,500 )
Salary to owners (68,500 )
Employee wages (59,000 )
Depreciation expense (12,500 )
Miscellaneous expenses (4,850 )
Interest income 13,390
Overall net income $ 9,040


What is Johnstone's accumulated adjustments account at the end of year 2, and what amount of dividend income does Marcus recognize on the year 2 distribution in each of the following alternative scenarios? (Leave no answer blank. Enter zero if applicable.)

1. Johnstone distributed $27,700 to Marcus in year 2.

a. Accumulated adjustments account

b.Dividend income

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Homework Answers

Answer #1
a.) Amount $
Beginning Accumulated adjustments account 0
Separately Stated Interest Income       13,390
Ordinary Loss ( 13,390 - 9,040 )       -4,350
Distribution from AAA       -9,040
Ending Accumulated adjustments account 0
b.) Amount $
Total Distribution       27,700
Less: From Accumulated adjustments account         9,040
Less: From Accumlated E&P       12,210
Balnce will reduce Marcus stock basis         6,450
Dividend income only to extent of Accumulated E&P      12,210
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