Question

53. [LO 11.4] At the beginning of year 1, Lisa and Marie were equal shareholders in LM Corporation, an S corporation. On April 30, year 1, Lisa sold half of her interest to Shelley. On August 8, year 1, Marie sold her entire interest to George. On December 31, year 1, the corporation reported net income of $50,000. How is this income allocated to Lisa, Marie, Shelley, and George

Answer 1

Answer:

• Lisa $16,611

• Marie $15,070

• Shelley $8,391

• George $9,933

Explanation:

Daily allocation of $50,000 net reported net income

= $50,000/365

= $137 per day

• Income allocated to Lisa would be ;

Since Lisa and Marie are equal shareholders; meaning both would have 50% stake each in the business. Moreover, since Lisa sold half of her stake I.e 50% ÷ 2 = 25% to Shelley, her share would be;

(50% × 120 × 137) + (25% × 245 × 137) = $16,611

° Note Jan 1 to April 30 is 120 days, while the balance is 365 days - 120 days hence 245 days

• Income allocated to Marie would be;

Since Marie have 50% stake in the business and also sold her entire interest to George, her share will be;

50% × 220 × 137 = $15,070

°Note Jan 1 to August 8 is 220 days

• Income allocated to Shelley would be;

Since Shelly bought 25% out of the 50% stake that Lisa have in the business, her share will be;

25% × 245 × 137 = $8,391

°Note 245 days will be applied to Shelly's share which represent the number of days she purchased part of Lisa's interest in the business. I.e. 365 days - 120 days = 245 days

• Income allocated to George would be;

Since George purchased the whole 50% of Marie's stake in the business, his share of profit will be;

50% × 145 × 137 = $9,933

° Note 145 days will also be applied to George which represent the balance of days with which he purchased Marie's whole stake in the business. I.e 365 days - 220 days = 145 days