Question

Yazou Corp. was formed as a calendar year S corporation with 3 shareholders. On August 15 of the current year (not a leap year), one of the shareholders sold his shares to a corporation, terminating the S corporation election. Yazou's accounting records reflect business income of $75,000 through August 15 and $45,000 from August 16 through December 31. Calculate Yazou's S corporation short year income, using both the daily method and the specific identification method.

Answer 1

To calculate Yazou Corp's S corporation short year income, the daily method provides an income of $75,000 by allocating the annual income to the number of days before the S election termination.

Step-by-step explanation:

To calculate Yazou Corp's S corporation short year income, we need to use both the daily method and the specific identification method.

Under the daily method, we divide the income for the entire year by the number of days in the year to get a daily income figure, and then multiply by the number of days in the short year period.

There are 365 days in a non-leap year. Yazou Corp earned $75,000 through August 15. Since January 1 to August 15 is 227 days, the daily income is $75,000 / 227 days = $330.40 per day. For the S corporation period of January 1 to August 15, the income is $330.40 per day * 227 days = $75,000 total.

Using the specific identification method, we take the actual income earned during the S corporation period, which was reported at $75,000. Therefore, under the specific identification method, the S corporation short year income is simply the income earned in that period, which is $75,000.

The specific identification method also results in a short year income of $75,000 by considering only the income earned during the S corporation period.