Question

Jeff owns 50% of an S corporation's stock with a basis in his stock of $50,000 on January 1. In addition, the S corporation owes Jeff $30,000 on January 1. The debt has a basis of $30,000 and is evidenced by a note. The S corporation reports an ordinary loss of $150,000 for the current year. The next year, it reports ordinary income of $20,000. On January 1 of the third year, the note is repaid. Due to the repayment of the note, Jeff must report what?

Answer 1

In the above question Jeff owns 50% of an S corporation which is reflecting as investment in Assets side of Balance sheet in the books of Jeff.

Further he is also liable to pay $ 30000 to S corporation which is evidenced by note and reflecting as liability in the balance sheet.

On January 1 of third year, Jeff has repaid the note. Hence following journal entries need to booked .

Notes Payable A/c ------------------ Dr $ 30000

To Bank Account $ 30000

This payment of $ 30000 have to be deducted from Notes Payable and from Bank Account.

Answer 2

He must report a 30,000K Gain.