Question

Erica is an executive at Gourmet Yogurt. Because she loves the yogurt so much, in the current year she decides to buy a yogurt machine from Gourmet for $10,300. The machine cost the company $10,000 (the wholesale price), and it has a fair market value of $13,500 (price at which sold at retail). Only executives are permitted to buy yogurt machines at a discount. The adjusted basis is $10,300, and income of $3,500 is recognized by Erica.

A) True

B) False

Answer 1

The statement is false because the taxable income should be the discount amount of $3,200 on the fair market value, not $3,500 as mentioned.

Step-by-step explanation:

The provided statement regarding Erica's purchase of a yogurt machine from Gourmet Yogurt is false. When an employee purchases an item from their employer at a discount, the difference between the fair market value and the purchase price is considered a fringe benefit and can be treated as taxable income.

In this case, Erica bought the yogurt machine at a price of $10,300, whereas the fair market value of the machine is $13,500. The difference, $3,200 ($13,500 - $10,300), should be recognized as a benefit and thus may be considered taxable income. The adjusted basis of the machine for Erica will indeed be $10,300, which is the amount she paid for it. The income recognized by Erica should not be $3,500, as stated, but rather $3,200, the discount she received on the fair market value.