Question

Nikki works for the Shine Company, a retailer of upscale jewelry. How much taxable income does Nikki recognize under the following scenarios?
a. Nikki buys a diamond ring from Shine Company for $16,900(normal sales price, $21,220; Shine Company's gross profit percentage is 40 percent).
b. Nikki receives a 26 percent discount on jewelry restoration services offered by Shine Company. This year, Nikki had Shine Company repair a set of antique earrings (normal repair cost $925; discounted price $684.50).

Answer 1

Answer:

a)

Calculate the percentage of discount that Mr Nikki receives from his Company Shine

Purchases price of diamond = $16,900
Sales price of diamond = $21,220

Discount received = Sales price of diamond - Purchases price of diamond
=$21220 - $16900
=$4320

Discount % = Discount received / Sales price x 100
=$4320/16900 x 100
=25.56%

The discount (25.56%) provided toMr. Nikki is less than the grossprofit (40%) of Company Shine Therefore, It does not include in taxable income.

b)

Discounts in excess of 20% for services are taxable.

Nikkin receives discount of $ ( 925 - 684.50) = $ 240.50

Discount exempt from tax = $ 925 x 20% = $ 185

Excess of discount received by Nikki over 20% = $ ( 240.5 - 185) = $ 55.5

Hence Nikki will recognize taxable income of $ 55.5 for the discounted services received by her.

Note:

In case any doubt please comment below ill explain your doubts. Please give positive ratings