Case study (3) (30 Marks) Solve each of the following independent cases: 1) Smit

Question

Case study (3) (30 Marks) Solve each of the following independent cases: 1) Smith operates a roof repair business. This year Smith's business generated cash receipts of $32,000 and Smith made the following expenditures associated with his business: Advertising Car and truck expenses Depreciation Employee compensation Education $ 500 1,360 3,200 5,000 1,000 The education expense was for a two-week, nighttime course in business management. Smith believes the expenditure should qualify as an ordinary and necessary business expense. What net income shou Smith report from his business? Smith is on the cash method and calendar year. 2) Bryon operates a consulting business and he usually works alone. However, during the summ Bryon will sometimes hire undergraduate students to collect data for his projects. This past summer Bryon hired Fred, the son of a prominent businessman, for a part-time summer job. The summer job usually pays about $17,000, but Bryon paid Fred $27,000 to gain favor with Fred's father. What amount of Fred's summer wages can Bryon deduct for tax purposes? Bry is on the cash method and calendar year.

Explanation / Answer

Answer 1. Cash Receipts          32,000 Expenses Advertising             500 Depreciation          3,200 Car & Truck Expenses          1,360 Employee Compensation          5,000 Education          1,000          11,060 Net Income          20,940 Answer 2. Wages deducted for Tax Purposes       17,000 Only $17,000 is deductible. The remaining $10,000 is not deductible and it will be treated as bribe and it is against the Public Policy. Answer 3. Amount Deductible = 50% X ($1,220 + $600) Amount Deductible = $910 Answer 4. Amount Deductible = $2,500 (Uniforms) + $5,000 (Life Insurance Premiums) Amount Deductible = $7,500

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