Question

Jarvie loves to bike. In fact, he has always turned down better-paying jobs to work in bicycle shops where he gets an employee discount. At Jarvie’s current shop, Bad Dog Cycles, each employee is allowed to purchase four bicycles a year at a discount. Bad Dog has an average gross profit percentage on bicycles of 25 percent. During the current year, Jarvie bought the following bikes:

Description	Retail Price		Cost		Employee Price
Specialized road bike	$	7,900	$	5,370	$	5,530
Rocky Mountain mountain bike		8,600		7,300		6,880
Trek road bike		4,300		2,950		3,010
Yeti mountain bike		5,500		4,030		4,400

a. What amount is Jarvie required to include in taxable income from these purchases?

AMOUNT TO BE INCLUDED:

Answer 1

Calculation of taxable income to be included
Step-1 Finding out discount given to the employees from the current retail price
Type of Bike	Retail price($)	Employee price($)	Discount given ($)
Specialized road	7900	5530	2370
Rocky mountain	8600	6880	1720
Trek road	4300	3010	1290
Yeti Mountain	5500	4400	1100

Step-2 Calculation average profit if sold at resale price
Type of Bike	Retail price($)	Average gross Profit 25%
Specialized road	7900	1975
Rocky mountain	8600	2150
Trek road	4300	1075
Yeti Mountain	5500	1375

Step-3 calculation employee discount given in excess of profit calculated
Type of Bike	Discount given ($)	Average gross Profit($)	Excess discount given($)=Taxable income
Specialized road	2370	1975	395
Rocky mountain	1720	2150	NIL
Trek road	1290	1075	215
Yeti Mountain	1100	1375	NIL
Total taxable income	610
Note:- taxable income is an amount which is calculated after reducing all deductions and exepmtions,hence discount given in excess of average gross profit is to be included in the taxable income,
Total taxable income here is ($395+$215) = $610