In Class Solution Bmgt 417
Chapter 08
Business Income, Deductions, and Accounting Methods
In-Class Homework Solutions
45. [LO 1] Manny hired his brother’s firm to provide accounting services to his business. During the current year, Manny paid his brother’s firm $82,000 for services even though other firms were willing to provide the same services for $40,000. How much of this expenditure, if any, is deductible as an ordinary and necessary business expenditure? Only reasonable amounts of compensation are deductible ($40,000), and the remainder would be reclassified probably as a gift to his brother.
46. [LO 1, 2] Indicate the amount (if any) that Michael can deduct as ordinary and necessary business deductions in each of the following situations and explain your solution.
a. From time to time, Michael rents a dump truck for his business. While hauling gravel to a job site, Michael was stopped for speeding. He paid a fine of $125 for speeding and a fine of $80 for carrying an overweight load.
b. Michael paid a part-time employee $750 to drive his rented dump truck. Michael reimbursed the employee $35 for gasoline for the truck.
c. Michael gave a member of the city council a new watch, which cost $200. He hopes that the city councilman will “throw” some contracts to his business.
a. No deduction for fines.
b. $785 deduction.
c. No deduction for bribes (against public policy).
47. [LO 1, 2] Indicate the amount (if any) that Josh can deduct as ordinary and necessary business deductions in each of the following expenditures and explain your solution.
a. Josh borrowed $50,000 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 $4,200 on the borrowed funds, but he received $3,500 of interest on the bonds.
b. Josh purchased a piece of land for $45,000 in order to get a location to expand his business. He also paid $3,200 to construct a new
Business Income, Deductions, and Accounting Methods
In-Class Homework Solutions
45. [LO 1] Manny hired his brother’s firm to provide accounting services to his business. During the current year, Manny paid his brother’s firm $82,000 for services even though other firms were willing to provide the same services for $40,000. How much of this expenditure, if any, is deductible as an ordinary and necessary business expenditure? Only reasonable amounts of compensation are deductible ($40,000), and the remainder would be reclassified probably as a gift to his brother.
46. [LO 1, 2] Indicate the amount (if any) that Michael can deduct as ordinary and necessary business deductions in each of the following situations and explain your solution.
a. From time to time, Michael rents a dump truck for his business. While hauling gravel to a job site, Michael was stopped for speeding. He paid a fine of $125 for speeding and a fine of $80 for carrying an overweight load.
b. Michael paid a part-time employee $750 to drive his rented dump truck. Michael reimbursed the employee $35 for gasoline for the truck.
c. Michael gave a member of the city council a new watch, which cost $200. He hopes that the city councilman will “throw” some contracts to his business.
a. No deduction for fines.
b. $785 deduction.
c. No deduction for bribes (against public policy).
47. [LO 1, 2] Indicate the amount (if any) that Josh can deduct as ordinary and necessary business deductions in each of the following expenditures and explain your solution.
a. Josh borrowed $50,000 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 $4,200 on the borrowed funds, but he received $3,500 of interest on the bonds.
b. Josh purchased a piece of land for $45,000 in order to get a location to expand his business. He also paid $3,200 to construct a new