Norma Formed Hyacinth Enterprises, a Proprietorship, in 2016

question 56

Multiple Choice

Norma formed Hyacinth Enterprises, a proprietorship, in 2016. In its first year, Hyacinth had operating income of $400,000 and operating expenses of $240,000. In addition, Hyacinth had a long-term capital loss of $10,000. Norma, the proprietor of Hyacinth Enterprises, withdrew $75,000 from Hyacinth during the year. Assuming Norma has no other capital gains or losses , and ignoring any self-employment taxes, how does this information affect her adjusted gross income for 2016?

• A)Increases Norma's adjusted gross income by $157,000 ($160,000 ordinary business income - $3,000 long-term capital loss).
• B)Increases Norma's adjusted gross income by $150,000 ($160,000 ordinary business income - $10,000 long-term capital loss).
• C)Increases Norma's adjusted gross income by $75,000.
• D)Increases Norma's adjusted gross income by $160,000.
• E)None of the above.

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Definitions:

Net Operating Income

Income from normal business operations after subtracting operating expenses but before interest and taxes.

Fixed Manufacturing Overhead

Expenses related to manufacturing that remain constant regardless of the level of production, such as building lease payments and equipment depreciation.

Deferred Inventories

Inventory costs that are not expensed in the period they are incurred but are deferred to a future period.

Absorption Costing

This accounting practice involves adding all costs associated with production, including direct materials, labor, and both kinds of overhead expenses (variable and fixed), into the cost calculation of a product.