 Hello and welcome to the session. This is Professor Farhad in which we would look at a CPA questions that looks like a simulation dealing with accumulated earnings and profit and accumulated adjustment accounts. You wanna be familiar with AEP and AAA accounts when you set for the CPA exam regulation section because they are important topics. So if you don't understand them before sitting on the exam, there's a good chance you may not be able to answer a lot of questions properly such as what's considered dividend and what's not considered dividend. This topic is also covered in my corporate tax course and this is how I can help you. In contrast to a CPA prep course which is, it's a great thing to have a CPA prep course like Becker, Roger, Wiley, Gleim, all of them. What I do is I provide you the basic knowledge. The knowledge that those CPA prep courses do not provide you. They assume you know it. They assume you know what AAA is and they work with it. If you don't know what AAA is, I strongly suggest you check out my supplemental material. Notice it's supplemental. You need your CPA prep course but I can help you with other material that's gonna help you explain in detail. So your CPA prep course will make much, much more sense to you. As always, link with me on LinkedIn if you haven't done so. Subscribe to my YouTube. I have 1,800 plus accounting, auditing finance tax as well as Excel tutorial. If you like my lectures, please like them, share them. If they benefit you, it means they might benefit other people and connect with me on Instagram. On my website, farhatlectures.com, this is where you will find the additional resources for your income tax course or your CPA exam regulation section. On my website, I have plenty of resources such as multiple choice, through false notes and 500 CPA questions. You'll have access to everything with one nominal fee. Let's take a look at this question. Adam Corporation was a C corporation until it elected its S corporation status on January 1st, year three. So simply put, year one and year two, we were a C corp. Adam Corp had accumulated earning and profit of 20,000 as of December 31st, year two. So when we were a C corp, we had 20,000 of ADP. From year three through year five, Adam Corp has ordinary income of 130 and made shareholder distribution of 90,000. Here we became a C corp, year three, year four, and year five. And in those years, we made 130,000 of income, of ordinary income, and the company distributed $90,000. In year six, Adam Corp had ordinary income of 40,000. In year six, we have ordinary income of 30,000 and we distributed 110,000. And we distributed 110,000. This is called distribution. Distribution, Adam bases on the stock as of January 1st, year six is 3,000. So this is what we are giving. This is what we are giving. This is the information that we are giving. So I'm gonna delete what we are giving now. I just showed it to you in a picture so it's easier to analyze. Now we're gonna go ahead and answer some questions. The first question is, what is Adam accumulated adjustment account triple A as of December 31st, year five? The first thing you want to know is triple A account deals with S corporation. When will we ask corporation? It's from year three to year five. We had income of 130 and we distributed 90,000. So our triple A account is 40,000. What is the triple A account represent? It represent the amount that was previously taxed. What does that mean? It means as an escort, when you made this 130,000, this 130,000 is taxed in the years that was made. Well, you distributed 90,000, it doesn't matter. That amount was already taxed and this 40,000 it's already taxed. Okay, so this is the triple A account you have taxed, previously taxed potential distribution of 40,000. That's all we're saying. So the triple A account is 40,000. How much distribution is taxable as dividend to the shareholder in year six? So in year six, we distributed 110,000. Now in year six, we also made 40,000. Therefore, in year six, we're gonna, from year six, we made 40,000. Remember, any distribution from the escort is not taxable because it was already taxed. And remember, we had 40,000 from the prior year that was triple A, I'm just gonna call it year five or I'm gonna call it from prior years, from prior years, those two are not taxable because those, the amounts have been already taxed. When you make the distribution, it's not taxable. So 110 minus 80, well, we still have 30,000. Now of this 30,000, we're gonna tap into the AEP. AEP of 20,000, we're gonna go back to when we were a C corporation, this amount is dividend. Remember, C corporation, the distribution from a C corporation is taxable once it's distributed. Now we distributed the money. So basically your AEP account now is zero. Your triple A account is zero too because you used up all your triple A. So 20,000 is dividend. Now, the remaining 10,000, we still have remaining 10,000 because we distributed 10,000. This amount, it could be tax free, it could be capital gain, okay? But the question is how much of the 110,000 is dividend and the answer is 20,000 is dividend. The 80,000 are not because those are from an escort. You already been taxed on those. The only amount is 20,000 is dividend. What is Adam's basis in the stock as of December 31st, year six? Well, what is Adam's basis? Well, Adam's basis was 3,000 at the beginning of the year. Then what happened is we had access distribution. We distributed $10,000 more. And what happened that this access distribution, it would reduce your basis if you have any access distribution. Now, you cannot deduct negative 10,000. So you cannot have negative basis. So we cannot have this. So what's gonna happen of the 10,000, we can only use 3,000 and bring Adam's basis down to zero. So of this access, we're gonna use 3,000 and what's left is 7,000. What are we gonna do with this 7,000? How are we gonna treat the 7,000? We're gonna treat the 7,000 as capital gain. So the remaining 7,000 will be considered capital gain. Simply put, we started with 110. The first 80,000 was from the S corp. That's technically, when it's distributed to you it's tax-free. It's not really tax-free because you already paid taxes on it, but when it's distributed, it doesn't matter. Then 20,000 of it was dividend. That was, that's taxable. Then 3,000 was tax-free because of the basis and the remaining 7,000 of the distribution is capital gain, capital gain. So this is how we distributed. Now this topic is covered in details on my website, farhatlectures.com. So if you really want to learn and understand this topic, go to my taxation course or go to CPA exam reg and I do have those lectures underneath this. Studying for your exam is a lifetime investment. It's gonna pay you dividend for years. Don't shortchange yourself, study hard, stay safe and good luck.