Cougar, Inc., is a calendar year S corporation. Cougar’s Form 1120S shows nonseparately stated ordinary income of $80,000 for the year. Johnny owns 40% of the Cougar stock throughout the year. The following information is obtained from the corporate records. Tax-exempt interest income $ 3,000 Salary paid to Johnny (52,000) Charitable contributions (6,000) Dividends received from a non-U. S. corporation 5,000 Short-term capital loss (6,000) Depreciation recapture income 11,000 Refund of prior state income taxes 5,000 Cost of goods sold (72,000) Long-term capital loss (7,000) Administrative expenses (18,000) Long-term capital gain 14,000 Selling expenses (11,000) Johnny’s beginning stock basis 32,000 Johnny’s additional stock purchases 9,000 Beginning AAA 31,000 Johnny’s loan to corporation 20,000 Compute Cougar’s book income or loss. Compute Johnny’s ending stock basis. Calculate Cougar’s ending AAA balance

Solution:

Revenues are the revenues generated by the sale of goods or the delivery of services in return. Investment of the sum as capital in the defense sector will also produce profits. It is used to serve the everyday business of the organization.

Computation of "Cougar Incorporation" book income or loss:

Particular                         Working note number        Amount

Ordinary income of "S Corporation"                         $80,000

Add: separately stated income         1                        $27,000

Less: separately stated loss                 2                        ($19,000)

Book income                                                                 $88,000

Working notes:

1.

Particular                                                                     Amount

Tax exempt interest income                                             $3,000

Dividend received from a non-U.S. corporation             $5,000

Refund of prior state income tax                                    $5,000

Long term capital gain                                                    $14,000

Total                                                                           $27,000

2.

Particular                                                                  Amount

Charitable contributions                                         $6,000

Short term capital loss                                                 $6,000

Long term capital loss                                                $7,000

Total                                                                       $19,000

b & c.) Computation of Cougar Incorporation's and ?Johnny's AAA amount and stock basis:

Particular   Cougar Incorporation AAA amount  Johnny stock basis (40%)

Beginning AAA             $31,000                    $32,000

Book income of cougar    $88,000                    $35,200

Additional investment                                     $9,000

End balance                     $1, 19,000                    $76,200

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