Waters Corporation is an S corporation with two equal shareholders, Mia Jones and David Kerns. This year, Waters recorded the following items of income and expense: $$\begin{array} { l r }
\text { Sales revenue } & \$ 500,000 \
\text { Interest income } & \mathbf { 6 , 0 0 0 } \
\text { Long-term capital gain } & \mathbf { 1 0 , 0 0 0 } \
\text { Cost of goods sold } & ( \mathbf { 2 5 0 , 0 0 0 } ) \
\text { Salary and wages } & ( \mathbf { 7 5 , 0 0 0 } ) \
\text { Other operating expenses } & ( 55,000 )
\end{array}$$ Waters distributed $25,000 to each of its shareholders during the year. Calculate the S corporation's ordinary (non-separately stated) income and indicate which items must be separately stated.

Question

Waters Corporation is an S corporation with two equal shareholders, Mia Jones and David Kerns. This year, Waters recorded the following items of income and expense: $$\begin{array} { l r } 
\text { Sales revenue } & \$ 500,000 \
\text { Interest income } & \mathbf { 6 , 0 0 0 } \
\text { Long-term capital gain } & \mathbf { 1 0 , 0 0 0 } \
\text { Cost of goods sold } & ( \mathbf { 2 5 0 , 0 0 0 } ) \
\text { Salary and wages } & ( \mathbf { 7 5 , 0 0 0 } ) \
\text { Other operating expenses } & ( 55,000 )
\end{array}$$ Waters distributed $25,000 to each of its shareholders during the year. Calculate the S corporation's ordinary (non-separately stated) income and indicate which items must be separately stated.

Quizplus · Accepted Answer

To calculate the S corporation's ordinary income, we need to add up sales revenue, interest income, and long-term capital gain and subtract cost of goods sold and wages and salaries:

$500,000 + $6,000 + $10,000 - $250,000 - $75,000 = $191,000 (ordinary income)

The items that must be separately stated are interest income and long-term capital gain. Therefore, the correct answer is B.

Waters Corporation Is an S Corporation with Two Equal Shareholders