Question

Hanover, Inc., is an S corporation. Shawn, the sole shareholder, has a stock basis of 10,000 at January 1, 20X1, and an accumulated adjustments account (AAA) balance of $0. Hanover, Inc., has never been a C corporation. For 20X1, the following takes place regarding Hanover, Inc.:

Taxable income $40,000

Tax-exempt income $5,000

Capital gain $8,000

Expenses applicable to tax-exempt income $1,000

Charitable contributions $2,000

Disallowed 50% of meal & entertainment expenses $500

Cash distribution to Shawn $20,000

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

A. $10,500

B. $17,500

C. $25,500

D. $32,000

Answer 1

Ans: )

C. $ 25,500

According the provisions of the U.S tax laws, the Accumulated Adjustments Account (AAA) of Hanover, Inc. at December 31 will be computed as follows:

	Opening Balance		$ 0
Add:	Taxable Income	$ 40,000
	Capital Gains	$ 8,000	$ 48,000
Less:	Charitable Contributions	$ (2,000)
	Disallowed meal & entertainment expenses	$(500)
	Cash distribution to Shawn	$(20,000)	$(22,500)
	Balance as on December 31		$ 25,500