Darnel owns 10% of the stock in Allison Company. During the current year, Allison has operating income of $200,000 and distributes $80,000 to its owners.
I.If Allison is a corporation, Darnel has $8,000 of income from Allison.
II.If Allison is a partnership, Darnel has $20,000 of income from Allison.

A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Question

Darnel owns 10% of the stock in Allison Company. During the current year, Allison has operating income of $200,000 and distributes $80,000 to its owners.
I.If Allison is a corporation, Darnel has $8,000 of income from Allison.
II.If Allison is a partnership, Darnel has $20,000 of income from Allison.
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A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Quizplus · Accepted Answer

In a corporation, dividends are distributed to shareholders based on their ownership percentage. Darnel owns 10% of Allison Company, so if the company distributes $80,000, Darnel would receive 10% of that, which is $8,000. This is considered dividend income. In a partnership, income is passed through to the partners based on their ownership percentage, regardless of whether the money is distributed. Therefore, Darnel would report $20,000 of income (10% of $200,000) from Allison if it is a partnership.

Darnel Owns 10% of the Stock in Allison Company