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