Winkin, Blinkin, and Nod are equal shareholders in SleepEZ, an S corporation. In

Question

Winkin, Blinkin, and Nod are equal shareholders in SleepEZ, an S corporation. In the conditions listed below, how much income should each report from SleepEZ for 2016 under both the daily allocation and the specific identification allocation method? Refer to the following table for the timing of SleepEZ’s income.

(Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount.)

a. There are no sales of SleepEZ stock during the year.

b. On April 19, 2016, Blinkin sells his shares to Nod.

c. On April 19, 2016, Winkin and Nod each sell their shares to Blinkin.

Period Income January 1 through April 19 (110 days) $ 209,000 April 20 through December 31 (256 days) 359,000 January 1 through December 31, 2016 (366 days) $ 568,000

Explanation / Answer

a)

In this case, because there was no change in ownership, there is no need to apply an allocation method (both give the same result).

Each shareholder will report $1,89,333 of income ($568,000 total income for year * 1/3 ownership)

b)

b. On April 19, 2016, Blinkin sells his shares to Nod.

Daily Allocation Method:

Winkin $189,333; (1/3 ownership x 366/366 days * $568,000 income)

Blinkin $56,903 (1/3 ownership * 110/366 days * $568,000 income)

Nod $321,763 [$189,333 (1/3 ownership * 366/366 days * $568,000 income) + $132,430 (1/3 ownership acquired * 256/366 days * $568,000 income)]

Specific Identification Method:

Winkin $189,333 (1/3 ownership * 209,000) + (1/3 ownership * 359,000)

Blinkin $69,667 (1/3 ownership * $209,000) + (0/3 ownership * $359,000)

Nod $309,000 (1/3 ownership * $209,000) + (2/3 ownership * $359,000)

c) On April 19, 2016, Winkin and Nod each sell their shares to Blinkin

Daily Allocation Method:

Winkin $56,903 (1/3 ownership x 110/366days x $568,000)

Nod $56,903 (1/3 ownership x 110/366days x $568,000)

Blinkin $444,425 (1/3 ownership x 110/366 days x $470,500) + (3/3 ownership x 256/366 days x $568,000)

Actual Allocation Method:

Winkin $69,667 (1/3 ownership x $209,000)

Nod $69,667 (1/3 ownership x $209,000)

Blinkin $428,667 (1/3 ownership x $209,000 + (3/3 ownership x $359,000)

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