At the beginning of year 1, Bill and Cindy form an S-corp and are equal shareholders, each gave $5,000 in exchange for stock. Cindy loaned the corp another $5,000 on June 30th of year. The corporation had an ordinary loss in its first year of $12,000 and ordinary income in its second year of $15,000. Assume that all parties use a calendar based taxable year and that neither the passive nor at-risk limitations are applicable. How much income does each shareholder recognize in the second year?

A. Each recognizes $7,500 of income.

B. Bill recognizes $6,500 of income and Cindy recognizes $7,500 of income.

C. Bill recognizes only $6,500 of income while Cindy recognizes $8,500 considering she got to deduct more of the first years loss than Bill.

D. Each recognizes only $6,500 of income because their first year loss deduction was limited to their equity contributions.