Ivory Corporation, a calendar year, accrual method C corporation, has two cash method, calendar year shareholders who are unrelated to each other. Craig owns 35% of the stock, and Oscar owns the remaining 65%. During 2016, Ivory paid a salary of $100,000 to each shareholder. On December 31, 2016, Ivory accrued a bonus of $25,000 to each shareholder. Assuming that the bonuses are paid to the shareholders on February 3, 2017, compute Ivory Corporation's 2016 deduction for the above amounts.
A)$250,000
B)$225,000
C)$200,000
D)$125,000
E)None of above

Question

Quizplus · Accepted Answer

The $100,000 salary paid to each shareholder is deductible by Ivory Corporation in 2016. Therefore, Ivory can deduct a total of $200,000 for the salaries paid to Craig and Oscar in 2016.

The $25,000 bonus accrued to each shareholder on December 31, 2016 is also deductible by Ivory Corporation in 2016, even though it was paid in 2017. Therefore, Ivory can deduct a total of $50,000 for the bonuses accrued to Craig and Oscar in 2016.

The total deductible amount for 2016 is $200,000 (salary) + $50,000 (bonus) = $250,000. However, since Craig owns only 35% of the stock, Ivory Corporation can only deduct 35% of the total deductible amount for Craig, which is $87,500 ($100,000 x 35% for salary + $25,000 x 35% for bonus). For Oscar, Ivory Corporation can deduct 65% of the total deductible amount, which is $137,500 ($100,000 x 65% for salary + $25,000 x 65% for bonus).

Therefore, the total deductible amount for Ivory Corporation in 2016 is $225,000 ($87,500 for Craig + $137,500 for Oscar). The correct answer is B) $225,000.

Ivory Corporation, a Calendar Year, Accrual Method C Corporation, Has