____ 31. Terry and Jim are both involved in operating illegal businesses. Terry
ID: 2587785 • Letter: #
Question
____ 31. Terry and Jim are both involved in operating illegal businesses. Terry operates a gambling business and Jim operates a drug running business. Both businesses have gross revenues of $500,000. The businesses incur the following expenses.
Terry
Jim
Employee salaries
$200,000
$200,000
Bribes to police
25,000
25,000
Rent and utilities
50,000
50,000
Cost of goods sold
–0–
125,000
Which of the following statements is correct and why (1-3 sentence justification)?
a.
Neither Terry nor Jim can deduct any of the above items in calculating the business profit.
b.
Terry should report profit from his business of $250,000.
c.
Jim should report profit from his business of $500,000.
d.
Jim should report profit from his business of $250,000.
e.
None of the above.
Terry
Jim
Employee salaries
$200,000
$200,000
Bribes to police
25,000
25,000
Rent and utilities
50,000
50,000
Cost of goods sold
–0–
125,000
Explanation / Answer
Bribe to police is not permitted by law thus disallowed .For Jim none of the expenses are allowed as deduction since its arestircted by law .
correct option is "B"
Terry Jim Gross revenue 500000 500000 Less:expenses cost of goods sold 0 -125000 Empoyee salaries -200000 0 Bribe to police 0 0 Rent and utilities -50000 0 Income 250000 375000Related Questions
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