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 $ 7,900 $ 5,370 $ 5,530
Rocky Mountain mountain bike 8,600 7,300 6,880
Trek road bike 4,300 2,950 3,010
Yeti mountain bike 5,500 4,030 4,400


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

Jarvie is required to include $6,480 in taxable income from his bike purchases. Bad Dog is allowed to claim $590 in deductions from these transactions.

Step-by-step explanation:

To calculate the amount Jarvie is required to include in taxable income from these purchases, we need to find the difference between the retail price and the employee price for each bike, and then add up those differences:

Specialized road bike: $7,900 - $5,530 = $2,370

Rocky Mountain mountain bike: $8,600 - $6,880 = $1,720

Trek road bike: $4,300 - $3,010 = $1,290

Yeti mountain bike: $5,500 - $4,400 = $1,100

The total amount Jarvie needs to include in taxable income is $2,370 + $1,720 + $1,290 + $1,100 = $6,480

To calculate the amount of deductions Bad Dog is allowed to claim from these transactions, we need to find the difference between the employee price and the cost for each bike, and then add up those differences:

Specialized road bike: $5,530 - $5,370 = $160

Rocky Mountain mountain bike: $6,880 - $7,300 = -$420 (Loss)

Trek road bike: $3,010 - $2,950 = $60

Yeti mountain bike: $4,400 - $4,030 = $370

Since there is a loss on the Rocky Mountain mountain bike, we cannot claim a deduction for that bike. The total amount of deductions Bad Dog can claim is $160 + $60 + $370 = $590