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 $10,780. Marcus is Johnstone’s sole shareholder, and he has a stock basis of $43,000 at the end of year 1. Johnstone Corporation Income Statement December 31, Year 2 Year 2 (S Corporation) Sales revenue $ 162,000 Cost of goods sold (38,000 ) Salary to owners (63,000 ) Employee wages (53,500 ) Depreciation expense (7,000 ) Miscellaneous expenses (4,300 ) Interest income 11,520 Overall net income $ 7,720 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 $6,600 to Marcus in year 2.

b) Johnstone distributed $10,600 to Marcus in year 2.

c) Johnstone distributed $16,600 to Marcus in year 2.

d) Johnstone distributed $26,600 to Marcus in year 2.

       

Answer 1

a) Johnstone distributed $6,600 to Marcus in year 2

AAA = $1,000; $0 dividend income on. distribution. because the. distribution was out. of .Johnstone’s AAA.

Beginning of year 2 AAA $0

Separately Stated Interest $11,520

Ordinary Loss($3,800)

Distribution from AAA($6,600)

End of Year AAA $1120

b.Johnstone .distributed $10,600 to Marcus. in year 2.AAA = $0; $3,800 dividend. income. $7,720 of the distribution came from. Johnstone’s AAA .and reduced Marcus’s. stock basis in Johnstone but .the $3,800 in excess of the AAA is a dividend. to the extent. of Johnstone’s. earnings and profits. Because. Johnstone’s E&P was $10,600, all $3,800 of. the excess. is a dividend. to Marcus. Johnstone’s E&P would be .reduced to $7,720 at the end of year 2.22-34

Beginning of year 2 AAA$0

Separately Stated Interest $11,520

Ordinary Loss($3,800)

Distributions out of AAA($7,720)

End of Year AAA$0

C)Johnstone distributed $16,600 to Marcus in year 2

AAA = $0; Dividend. income is $8,880. $7,720 of the .distribution came. from Johnstone’s AAA and reduced Marcus’s stock basis in Johnstone but the $8,880 in excess of the AAA is a dividend. to the extent of Johnstone’s earnings and profits. Because Johnstone’s E&P was $11,520, all $8,880 of the. excess is a dividend to Marcus. Johnstone’s E&P would be reduced to $2,640 at the end of year 2.

Beginning of year 2 AAA$0

Separately Stated Interest $11,520

Ordinary Loss($3,800)

Distributions out of AAA($7,720)

End of Year AAA$0

d) Johnstone distributed $26,600 to Marcus in year 2

AAA = $0; Dividend income is $18,880. $7,720 of the distribution came from Johnstone’s AAA and reduced Marcus’s stock basis in Johnstone but the $18,880 in excess of the AAA is a dividend to the extent of Johnstone’s earnings and profits. Because Johnstone’s E&P was $11,520, all $18,880 of the excess is a dividend to Marcus. Johnstone’s E&P would be reduced to -$7360 at the end of year 2

Beginning of year 2 AAA$0

Separately Stated Interest $11,520

Ordinary Loss($3,800)

Distributions out of AAA($7,720)

End of Year AAA$0

Please like