Assume the following year 2 income statement for Johnstone Corporation, which was a C corporation in year 1 and elected to be taxed as an S corporation beginning in year 2. Johnstones earnings and profits at the end of year 1 were $10,000. Marcus is Johnstones sole shareholder, and he has a stock basis of $40,000 at the end of year 1. What is Johnstones accumulated adjustments account at the end of year 2, and what amount of dividend income does Marcus recognize on the year 2 distribution in each of the following alternative scenarios?
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