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____ 31. Terry and Jim are both involved in operating illegal businesses. Terry

ID: 2587785 • Letter: #

Question

____   31.   Terry and Jim are both involved in operating illegal businesses. Terry operates a gambling business and Jim operates a drug running business. Both businesses have gross revenues of $500,000. The businesses incur the following expenses.

Terry

Jim   

Employee salaries

$200,000

$200,000

Bribes to police

25,000

25,000

Rent and utilities

50,000

50,000

Cost of goods sold

–0–

125,000

Which of the following statements is correct and why (1-3 sentence justification)?

a.

Neither Terry nor Jim can deduct any of the above items in calculating the business profit.

b.

Terry should report profit from his business of $250,000.

c.

Jim should report profit from his business of $500,000.

d.

Jim should report profit from his business of $250,000.

e.

None of the above.

Terry

Jim   

Employee salaries

$200,000

$200,000

Bribes to police

25,000

25,000

Rent and utilities

50,000

50,000

Cost of goods sold

–0–

125,000

Explanation / Answer

Bribe to police is not permitted by law thus disallowed .For Jim none of the expenses are allowed as deduction since its arestircted by law .

correct option is "B"

Terry Jim Gross revenue 500000 500000 Less:expenses cost of goods sold 0 -125000 Empoyee salaries -200000 0 Bribe to police 0 0 Rent and utilities -50000 0 Income 250000 375000