Question

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 $10,650. Marcus is Johnstone’s sole shareholder, and he has a stock basis of $42,500 at the end of year

Johnstone Corporation
Income Statement
December 31, Year 2
	Year 2
	(S Corporation)
Sales revenue	$	160,000
Cost of goods sold		(37,500	)
Salary to owners		(62,500	)
Employee wages		(53,000	)
Depreciation expense		(6,500	)
Miscellaneous expenses		(4,250	)
Interest income		11,350
Overall net income	$	7,600

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.)

a. Johnstone distributed $6,500 to Marcus in year 2.

b. Johnstone distributed $10,500 to Marcus in year 2.

c. Johnstone distributed $16,500 to Marcus in year 2.

d. Johnstone distributed $26,500 to Marcus in year 2.

Answer 1

Part A

Accumulated adjustments account = 800

Dividend income=0

Beginning of year 2 AAA	0
Separately Stated Interest	10350
Ordinary Loss	(3050) (7600-10650)
Distribution from AAA	(6500)
End of Year AAA	800

Part B

Accumulated adjustments account = 0

Dividend income= 3050

Beginning of year 2 AAA	0
Separately Stated Interest	10350
Ordinary Loss	(3050) (7600-10650)
Distribution from AAA	(7600) (limited to AAA available)
End of Year AAA	0

Part C

Accumulated adjustments account = 0

Dividend income= $8900 (16500-7600)

Beginning of year 2 AAA	0
Separately Stated Interest	10350
Ordinary Loss	(3050) (7600-10650)
Distribution from AAA	(7600) (limited to AAA available)
End of Year AAA	0

Part D

Accumulated adjustments account = 0

Dividend income= $10350

Beginning of year 2 AAA	0
Separately Stated Interest	10350
Ordinary Loss	(3050) (7600-10650)
Distribution from AAA	(7600) (limited to AAA available)
End of Year AAA	0