Question

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?
(a) Neither Terry nor Jim can deduct any of these items in calculating the business profit.
(b) Jim should report profit from his business of $500,000.
(c)Terry should report profit from his business of $250,000. (d)Jim should report profit from his business of $250,000. (e)None of these choices are correct.

Answer 1

Answer:

(c)Terry should report profit from his business of $250,000

Explanation:

Before computing the actual solution, first, we have to compute the net income of both the parties

For Terry = Gross revenue - employees salaries - rent and utility expenses

               = $500,000 - $200,000 - $50,000

               = $250,000

For Jim = Gross revenue - cost of goods sold

             = $500,000 - $125,000

            = $375,000

The other item values would not relevant for deduction. Hence, ignored it

Therefore, option c is correct.