Question - The Brock's business, Westchester Wood, has the following income and expenses.
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Income:
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Receipts from sales of unfinished furniture
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$65,000
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Receipts from services to stain/paint furniture
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12,000
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Receipts from sales of paint and stain products
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1,000
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Expenditures:
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Cost of furniture
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$38,000
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Cost of stains and paints
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2,500
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Depreciation expense on building
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7,000
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Advertising
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1,200
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Auto expenses (delivering furniture)
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900
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Loading dock (new)
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22,000
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Utilities
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6,000
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Insurance
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3,500
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Labor (to stain/paint furniture)
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9,800
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Property taxes
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5,000
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Delivery truck (used truck)
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9,500
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Bank fees
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2,000
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Telephone
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2,500
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Computer
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1,300
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Meals and entertainment
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1,800
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Accounting
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6,000
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Landscaping
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2,400
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Maintenance
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1,200
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The amount for landscaping includes $800 for maintaining the Brock's personal residence. The utilities include $2,000 of oil that was delivered to the Brock's home.
1. Assume Westchester Wood is a business:
a. identify which expenditures are ordinary, necessary and reasonable,
b. whether the expenditures should capitalized or expensed, and
c. calculate net income or loss.
2. Assume that Westchester Wood is a hobby:
a. identify expenditures (ignore any that would be capitalized) that are allowed and to what extent and
b. identify which expenditures are Tier 1, Tier 2 or Tier 3 expenses.