Paula Is the Sole Shareholder of Violet,Inc

question 119

Multiple Choice

Paula is the sole shareholder of Violet,Inc.For 2015,she receives from Violet a salary of $300,000 and dividends of $100,000.Violet's taxable income for 2015 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.

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Definitions:

Common Stock

A type of equity security that represents ownership in a corporation, with voting rights and the potential to receive dividends.

Gain or Loss

The financial result that occurs when the selling price of an asset differs from its carrying amount on the books.

Equity Method

An accounting technique used to record investments in associate companies, recognizing the investor's share of the investee's profits or losses.

Investee's Net Income

The portion of profit or income earned by a company in which another company has invested.