Let's calculate the accumulated adjustment account for Johnstone Corporation. It was a C corporation but it elected to be taxed as an S corporation. Okay, it was a C corporation in year one and elected to be taxed as an S corporation beginning in year two. Here we have the information on earnings and profits, and we know that at the end of year one, it was $10,650. Marcus is Johnston's sole shareholder and he has a stock basis of $42,500 at the end of year one. So we have the following information about year two for the S corporation. Now, the question appears: What is Johnstone's accumulated adjustments account at the end of year two and what amount of dividend income does Marcos recognize on the year two distribution in each of the following alternative scenarios? Now, let's see the answer, which is $1,100. How did we come up with this? Well, we need to consider that there is zero dividend income on distribution because the distribution was out of Johnstone's AAA. So the dividend income on the distribution is zero because the distribution was out of Johnstone's accumulated adjustment account. Now, let's look at the calculations of how we came up with that $1,100. The beginning of year two of his Triple A was zero. The separately stated interest was $11,350, as provided here. The ordinary loss was $3,750, and the distribution from the Triple A was $6,500. As a result, we can calculate the end of year Triple A to be $1,100.
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