Question

Keith, Inc., becomes an S corporation on January 1, 20X1. Sally, the sole shareholder, has a stock basis of $20,000 at January 1, 20X1, an accumulated adjustments account (AAA) balance of $0, and an earning and profits account in the amount of $6,000. For the 20X1 taxable year, Keith, Inc., has the following:

       Taxable income                       $30,000

       Tax-exempt income                       $4,000

       Capital gain                           $5,000

       Expenses applicable to tax-exempt income           $1,000

       Charitable contributions                   $400

       Disallowed 50% of meal and entertainment expenses   $800

       Cash distribution to Sally                   $18,000

What is the AAA of Keith, Inc., at December 31, 20X1?

A. $15,800

B. $22,300

C. $25,000

D. $34,000

Answer 1

`

Particulars	Amount ($)	Amount ($)
Taxable income		30,000.00
Add: Expense applicable to tax exempt income	1,000.00
Meal and entertainment expenses (800 x 50%)	800.00
		1,800.00
		31,800.00
Add: Tax exempt income	4,000.00
Capital gain	5,000.00
		9,000.00
		40,800.00
Less: Charitable contributions		400.00
		40,400.00
Less: Amount distributed to Sally		18,000.00
Accumulated adjusted account		22,400.00

Thus, correct answer is AAA on 31^st December is $22,400.