Question

Towne, Inc., a calendar year S corporation, holds AAA of $637,050 at the beginning of the tax year. During the year, the following items occur.

Sales income                                                                            $216,000

Officers’ life insurance proceeds                                                 100,000

Premiums paid for officers’ life insurance                                      (3,600)

Dividend income                                                                          17,000

Interest income                                                                              3,000

Charitable contributions                                                              (22,000)

§ 179 depreciation expense                                                            (2,500)

Administrative expenses                                                              (35,000)

Cash distributions to shareholders                                                (75,220)

Calculate Towne’s ending AAA balance.

Answer 1

ANS: Calculation of Towne's ending AAA balance (Currency in $)

Particulars	Amount
Opening AAA Balance	637050
Add: Sales Income	216000
Add: Dividend Income	17000
Add: Interest Income	3000
Sub-Total	873050
Less: Charitable contribution	-22000
Less: § 179 depreciation expense	-2500
Less: Administrative expenses	-35000
Sub-Total	813550
Less: Cash distributions to shareholders	-75220
Closing AAA Balance	738330

Note : Officers’ life insurance proceeds is a tax exempt proceed & it doesnot reduce the AAA balance. As the Income from life Insurance is exempt or not taxable, it's related expense as Premiums paid for officers’ life insurance shall also not allowable as deduction.