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:

Description	Retail Price		Cost		Employee Price
Specialized road bike	$	7,200	$	4,900	$	5,040
Rocky Mountain mountain bike		5,200		3,750		4,160
Trek road bike		3,300		2,760		2,310
Yeti mountain bike		3,300		2,900		2,640

Problem 12-48 Part a (Algo)

a. What amount is Jarvie required to include in taxable income from these purchases?

b. What amount of deductions is Bad Dog allowed to claim from these transactions?

Answer 1

Solution:

1)

Description	Retail price	Average gross	Net of retail price	Employee price	Income
	a	b =a*25%	c = a - b	d	e = c -d
Specialized road bike	7,200	1,800	5,400	5,040	360
Rocky mountain moutain bike	5,200	1,300	3,900	41,60	0 (as value is negative)
Trek road bike	3,300	825	2,475	2,310	165
Yeti moutian bike	3,300	825	2,475	2,640	0 (as value is negative)
Total income					525

Amount to be included in Jarvie income is $525

b)

Total cost = $4,900+$3,750 +$2,760 +$2900

=$14,310

Bad dog can claim $14,310 as deduction from these transcation.

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