Question

The Royal Motor Company manufactures automobiles. Nonmanagement employees of the company can buy a new automobile for Royal's cost plus 2%. The automobiles are sold to dealers at cost plus 20%. Generally, management employees of Local Dealer, Inc., are allowed to buy a new automobile from the company at the dealer's cost. Which of the following statements is correct?

a) The nonmanagement employees who buy automobiles at a discount are not required to recognize income from the purchase.

b) None of the employees who take advantage of the fringe benefits described above are required to recognize income.

c) Employees of Royal are required to recognize as gross income 18% (20% - 2%) of the cost of the automobile purchased.

d) All of these.

e) None of these.

Answer 1

Employees of the Royal Motor Company are required to recognize as gross income 18% of the cost of the automobile purchased.

Step-by-step explanation:

The correct statement is option c) Employees of Royal are required to recognize as gross income 18% (20% - 2%) of the cost of the automobile purchased. Nonmanagement employees can buy a new automobile for Royal's cost plus 2%, while dealers can buy it at cost plus 20%. This means that nonmanagement employees receive a discount of 2% from the cost price, while dealers receive a markup of 20% from the cost price. Therefore, employees of Royal need to recognize 18% (20% - 2%) of the difference between the cost price and the actual price paid as gross income.