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 $10,000. Marcus is Johnstone's sole shareholder. 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?

Johnstone Corporation

Income Statement

December 31, year 2

_____________________________Year 2 (S corporation)

Sales Revenue .................................... $150,000

Cost of Goods Sold .............................. (35,000)

Salary to owners .................................. (60,000)

Employee Wages ................................. (50,000)

Depreciation Expense ........................... (4,000)

Miscellaneous Expenses ....................... (4,000)

Interest income .................................... 10,000

Overall Net Income ............................... $7,000

a. Johnstone distributed $6,000 to Marcus in year 2.

b. Johnstone distributed $10,000 to Marcus in year 2.

c. Johnstone distributed $16,000 to Marcus in year 2.

d. Johnstone distributed $26,000 to Marcus in year 2.