Chapter 8

(1). Indicate the amount (if any) that Josh can deduct as ordinary and necessary business deductions in each of the following situations.

(a). Josh borrowed $55,500 from the First State Bank using his business assets as collateral. He used the money to buy City of Blanksville bonds. Over the course of a year, Josh paid interest of $13,200 on the borrowed funds, but he received $11,400 of interest on the bonds.

Deductible amount

(b).Josh purchased a piece of land for $81,000 in order to get a location to expand his business. He also paid $6,000 to construct a new driveway for access to the property.

Deductible amount

(c).This year Josh paid $20,100 to employ the mayors son in the business. Josh would typically pay an employee with these responsibilities about $18,300 but the mayor assured Josh that after his son was hired, some city business would be coming his way.

Deductible amount

(d). Josh paid his brother, a mechanic, $5,850 to install a robotic machine for Joshs business. The amount he paid to his brother is comparable to what he would have paid to an unrelated party to do the same work. Once the installation was completed by his brother, Josh began calibrating the machine for operation. However, by the end of the year, he had not started using the machine in his business. Deductible amount

(2). Ryan is self-employed. This year Ryan used his personal auto for several long business trips. Ryan paid $2,400 for gasoline on these trips. His depreciation on the car if he was using it fully for business purposes would be $3,300. During the year, he drove his car a total of 19,800 miles (a combination of business and personal travel). (Do not round intermediate calculations. Round your final answer to the nearest dollar amount.)

(a). Ryan can provide written documentation of the business purpose for trips totaling 5,940 miles. What business expense amount can Ryan deduct (if any) for these trips?

Maximum deductible amount

(b). Ryan estimates that he drove approximately 1,625 miles on business trips, but he can only provide written documentation of the business purpose for trips totaling 1,110 miles. What business expense amount can Ryan deduct (if any) for these trips?

Maximum deductible amount

(3). This year Amy purchased $3,450 of equipment for use in her business. However, the machine was damaged in a traffic accident while Amy was transporting the equipment to her business. Note that because Amy did not place the equipment into service during the year, she does not claim any depreciation expense for the equipment.

(a). After the accident, Amy had the choice of repairing the equipment for $2,440 or selling the equipment to a junk shop for $680. Amy sold the equipment. What amount can Amy deduct for the loss of the equipment?

Deductible amount

(b). After the accident, Amy repaired the equipment for $1,320. What amount can Amy deduct for the loss of the equipment?

Deductible amount

(c). After the accident, Amy could not replace the equipment so she had the equipment repaired for $4,750. What amount can Amy deduct for the loss of the equipment?

Deductible amount

(4). In October of year 0, Janine received a $20,590 payment from a client for 29 months of security services she will provide starting on December 1 of year 0. This amounts to $710 per month.

(a). When must Janine recognize the income from the $20,590 advance payment for services if she uses the cash method of accounting?

	Year 0
	Year 2
	Year 1
	Year 0 and year 1
	Year 1 and year 2

c.

Suppose that instead of services, Janine received the payment for a security system (inventory) that she will deliver and install in year 2. When would Janine recognize the income from the advance payment for inventory sale if she uses the accrual method of accounting and she uses the deferral method for reporting income from advance payments? For financial accounting purposes, she reports the income when the inventory is delivered.

	Year 0
	Year 1 and year 2
	Year 2
	Year 1
	Year 0 and year 1

(d). Suppose that instead of services, Janine received the payment for the delivery of inventory to be delivered next year. When would Janine recognize the income from the advance payment for sale of goods if she uses the accrual method of accounting and she uses the full-inclusion method for advance payments?

	Year 0 and year 1
	Year 0
	Year 1
	Year 2
	Year 1 and year 2