25 May Question 1. Paula is the sole shareholder of Violet, Inc. For 2014, she r
Question
1. Paula is the sole shareholder of Violet, Inc. For 2014, she receives from Violet a salary of $300,000 and dividends of $100,000. Violet’s taxable income for 2014 is $500,000. On audit, the IRS treats $100,000 of Paula’s salary as unreasonable. Which of the following statements is correct?
a. Paula’s gross income will increase by $100,000 as a result of the IRS adjustment.
b. Violet’s taxable income will not be affected by the IRS adjustment.
c. Paula’s gross income will decrease by $100,000 as a result of the IRS adjustment.
d. Violet’s taxable income will decrease by $100,000 as a result of the IRS adjustment.
e. None of the above is correct.
.
2. During 2013, the first year of operations, Silver, Inc., pays salaries of $175,000. At the end of the year, employees have earned salaries of $20,000, which are not paid by Silver until early in 2014. What is the amount of the deduction for salary expense?
a. If Silver uses the cash method, $175,000 in 2013 and $0 in 2014.
b. If Silver uses the cash method, $0 in 2013 and $195,000 in 2014.
c. If Silver uses the accrual method, $175,000 in 2013 and $20,000 in 2014.
d. If Silver uses the accrual method, $195,000 in 2013 and $0 in 2014.
e. None of the above is correct.
3. Benita incurred a business expense on December 10, 2014, which she charged on her bank credit card. She paid the credit card statement which included the charge on January 5, 2015. Which of the following is correct?
a. If Benita is a cash method taxpayer, she cannot deduct the expense until 2015.
b. If Benita is an accrual method taxpayer, she can deduct the expense in 2014.
c. If Benita uses the accrual method, she can choose to deduct the expense in either 2014 or 2015.
d. Only b. and c. are correct.
e. a., b., and c. are correct.
4. Payments by a cash basis taxpayer of capital expenditures:
a. Must be expensed at the time of payment.
b. Must be expensed by the end of the first year after the asset is acquired.
c. Must be deducted over the actual or statutory life of the asset.
d. Can be deducted in the year the taxpayer chooses.
e. None of the above.
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