Jarvie loves to bike. In fact, he has always turned down better paying jobs to w
ID: 2418444 • Letter: J
Question
Jarvie loves to bike. In fact, he has always turned down better paying jobs to work in bicycle shops where he gets an employee discount. At Jarvie’s current shop, Bad Dog Cycles, each employee is allowed to purchase four bicycles a year at a discount. Bad Dog has an average gross profit percentage on bicycles of 25 percent. During the current year, Jarvie bought the following bikes:
What amount is Jarvie required to include in taxable income from these purchases?
What amount of deductions is Bad Dog allowed to claim from these transactions?
Price Specialized road bike $7,200 $5,300 $5,040 Rocky Mountain mountain bike 5,700 4,400 4,560 Trek road bike 2,500 2,250 1,750 Yeti mountain bike 5,700 4,650 4,560
Explanation / Answer
a. The amount which Jarvie can include in his taxable income from these purchases will be the lower of cost or retail price or employee price, whichever is lower.
Accordingly, the amount which Jarvie can include in his taxable income will be $ 5,040 + $ 4,400 + $ 1,750 + $ 4,560 = $ 9,440 + $ 6,310 = $ 15,750..
b. Deductions which Bad Dog is allowed to claim from these transactions is equivalent to the lower of the actual cost of the bikes sold or the derived cost (Sales - 25% Contribution)
Accordingly, the deduction which can be claimed per bike is
Specialised Road Bike = Lower of $ 7,200 X 75% = $ 5,400 or $ 5,300 = $ 5,300
Rocky Mountain Mountain Bike = Lower of $ 5,700 X 75% = $ 4,275 or $ 4,400 = $ 4,275
Trek Road Bike = Lower of $ 2,500 X 75% = $ 1,875 or $ 2,250 = $ 1,875
Yeti Mountain Bike = Lower of $ 5,700 X 75% = $ 4,275 or $ 4650 = $ 4,275
Therefore, the total deduction which can be claimed by Mad Dog = $ 5,300 + $ 4,275 + $ 1,875 + $ 4,275 = $ 15,725.
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