Question

Gina, a real estate broker, had the following income and expenses in her business:

Commissions income 100,000
Expenses:
Commissions paid to non-brokers for referrals
(illegal under state law and subject to criminal penalties) 20,000
Commissions paid to other real estate brokers for referrals
(not illegal under state law) 10,000
Travel and transportation 12,000
Supplies 4,000
Office and phone 5,000
Parking tickets 500

How much net income must Gina report from this business?
1) 49,000
2) 60,000
3) 68,500
4) 48,500
5) 69,000

Answer 1

Gina's net income is calculated by subtracting her allowable business expenses from her total commissions income. Illegal expenses and non-business related costs, such as commissions paid to non-brokers and parking tickets, cannot be deducted. Gina's correct net income to report is $69,000.

Step-by-step explanation:

To calculate Gina's net income from her real estate business, we need to consider her income and allowable expenses.

We start with her total commissions income which is $100,000. From this, we subtract the legal and explicit costs of doing business, which include commissions paid to other real estate brokers, travel and transportation, supplies, office, and phone expenses.

• Commissions paid to non-brokers: $20,000 (These are illegal and therefore cannot be deducted.)
• Commissions paid to other brokers: $10,000
• Travel and transportation: $12,000
• Supplies: $4,000
• Office and phone: $5,000
• Parking tickets: $500 (This is not an allowable business expense.)

Next, we add the allowable expenses to get the total expenses: $10,000 + $12,000 + $4,000 + $5,000 = $31,000.

Subtracting the total expenses from her commissions income gives us Gina's net income: $100,000 - $31,000 = $69,000.

Thus, the correct answer is option 5) $69,000.