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 $10,260. Marcus is Johnstone's sole shareholder, and he has a stock basis of $41,000 at the end of year 1.

Johnstone Corporation
Income Statement
December 31, Year 2
	Year 2 (S Corporation)
Sales revenue	$ 154,000
Cost of goods sold	(36,000)
Salary to owners	(61,000)
Employee wages	(51,500)
Depreciation expense	(5,000)
Miscellaneous expenses	(4,100)
Interest income	10,840
Overall net income	$ 7,240

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?

d. Johnstone distributed $26,200 to Marcus in year 2.

Accumulated adjustments account_$0.00

Dividend Income_$___________

VERY IMPORTANT NOTE: I posted this before so I thought I would list the previous answer because it was incorrect. The previous answer given for Dividend income was $8600 (- or +).

The answer for Accumulated adjustments account is $0 (zero) and has been confirmed as correct.