Mr and Mrs Williams Are the Sole Shareholders of Lessing

question 31

Multiple Choice

Mr and Mrs Williams are the sole shareholders of Lessing, Inc., a regular corporation. Last year, Lessing employed the Williams' son and paid him a $50,000 salary. During a recent IRS audit, the revenue agent discovered that the son rarely shows up for work and spends most of his time playing golf. Which of the following statements is true?

• A) The IRS can treat the $50,000 payment as a constructive dividend to the son.
• B) The IRS can treat the $50,000 payment as a constructive dividend to Mr. and Mrs Williams.
• C) The IRS can disallow Lessing's $50,000 deduction for the son's salary.
• D) The IRS can treat the $50,000 payment as a constructive dividend to Mr. and Mrs Williams and can disallow Lessing's $50,000 deduction for the son's salary.

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Definitions:

Accrued Revenues

Revenues that have been earned but not yet received in cash or recorded at the statement date.

Current Liabilities

Short-term financial obligations due within one year, including accounts payable, short-term debt, and other accrued liabilities.

Balance Sheet

A financial statement that presents a company's financial position, including assets, liabilities, and equity, at a specific point in time.

Closing Process

The process of transferring the balances of temporary accounts to permanent accounts at the end of the accounting period.