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. Johnstones earnings and profits at the end of year 1 were $10,780. Marcus is Johnstones sole shareholder, and he has a stock basis of $43,000 at the end of year 1.

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	$	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

1. Johnstone distributed $10,600 to Marcus in year 2. What is dividend income?

2. Johnstone distributed $16,600 to Marcus in year 2. What is dividend income?

3. Johnstone distributed $26,600 to Marcus in year 2. What is dividend income?