This is a corporation taxation question. I do not understand why the reported di

Question

This is a corporation taxation question. I do not understand why the reported dividend income for february 1 is 1000 instead of 10000 and why it is 500 for september 1 instead of 5000. Also how did they get 7500 for the tax free distribution?
86. On January d, 2015, Kinney, Ine, an electing S corporation, holds $5,000 of two shareholders, Eric and Maria, each of whom owns 500 shares of Kinn $6,000. Kinney distributes $6,000 to each shareholder on February 1 2015,,stock Kinney, 201,AA Kinney h s shareholder on September 1. How is Erin taxed on the distribution?istrbtes nother $3 income is ation, holds $5,000 of AEP and $9,000 in AAA. Kinney hats nc., an electings 500 shares of Kinney's stock. Kinney's 2015 taxable income is on February 1, 2015, and distributes another $3,000 to each a. $500 dividend income. b. $1,000 dividend income. c. $1,500 dividend income. d. $3,000 dividend income. e. None of the above. ANSWER: RATIONALE AAA is $15,000 ($9,000+ $6,000) as of December 31, 2015, before taking into account the two distributions. Thus, the sum of the distributions (S18,000) exceeds Kinney's AAA by $3,000. A portion of the $15,000 AAA balance is allocated to each of the February 1 and September T distributions, based upon the respective sizes of the distributions, as follows. $12.000x $15,000-$10,000 X %of does and xX4 fte February 1: 18,000 $15,000 $10,000 owra shard here $ 6.000 $18,000 × $15,000-$5,000 000-si September 1: t ThasEe Thus, Eric and Maria report dividend income of $1,000 each for the February 1 distribution c rap and $500 each for the September 1 distribution. Assuming that the shareholders have sufficient basis in their stock, both Eric and Maria each have a $7,500 tax-free distribution from AAA

Explanation / Answer

it is very easy follow below notes:

Taxable income exceeds AAA = 18000 - 15000 = 3000

income exceeds AAA is only taxable in the hands of erin and maria.

reamaining 7500 of each amount is not taxable because tax free distribution.

7500 of each is 15000 / 2.

So 3000 is taxble on feb and september 1

Feb = 3000 * 12000 / 18000 = 2000

Each one taxable income = 2000 / 2 = 1000

Sept 1 = 3000 * 6000 / 18000 = 1000

Each one taxable income = 1000 / 2 = 500

I think it is helpful.

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