Wilma Is CEO of and Owns 100 Percent of WT

question 21

Multiple Choice

Wilma is CEO of and owns 100 percent of WT Enterprises,a cash-basis,calendar-year corporation.The company has always been profitable but over the last five years Wilma's salary has increased from over $400,000 per year to over $1,000,000 and it has failed to pay dividends.Which of the following will not occur if the IRS determines that $500,000 of her salary is unreasonable?

• A)Wilma will pay an additional tax on the $500,000 recharacterized as dividend.
• B)Wilma will be eligible for a refund of Medicare taxes.
• C)WT will lose a $500,000 deduction for the recharacterized dividend.
• D)WT will be eligible for a refund of a portion of FICA taxes paid.

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Definitions:

Variable Manufacturing Overhead

Manufacturing overhead costs that fluctuate with the level of production activity.

Overhead Rate Variance

The difference between the actual overhead costs incurred and the standard overhead costs assigned to production.

Materials Price Variance

The difference between the actual cost of direct materials used in production and the expected (budgeted) cost of those materials.

Materials Standards

Predetermined benchmarks for the cost and quantity of materials used in the production process.