Question

Julia is single. Julia operates a lawn care business as a sole proprietorship. In 2019, Julia had her best year ever. Because she did so well, Julia had custom hats and shirts made with her business logo on them. She upgraded the shirts and hats to the top-of-the-line products instead of getting the cheap ones. She gave the hats and shirts to family and friends to wear around as advertising. Julia is also a huge baseball fan. She attends many of the games for her local team. On occasion, Julia gets autographs from players and sells the signed memorabilia on eBay. On one particular occasion, Julia knew Mike Trout’s team was playing against her team. Julia bought a ticket to the game so she could try to get his autograph. The ticket cost $100. Julia got Mr. Trout’s autograph and was going to give the ball to her nephew. However, another fan offered her $50 for the ball and Julia sold it to the fan. 2019 income and expenses: Income: $85,000 gross income from lawn care $50 from sale of signed baseball $5,000 gain on the sale of a Company Y stock held for five months Expenses: $20,000 of operating expenses (fuel, repairs on equipment, wages to employees) $4,000 for the hats and shirts $100 for ticket to game $10,000 loss on the sale of Company X stock held for six months. Please calculate Julia’s adjusted gross income for 2019

Answer 1

As per the Business Entity Concept of GAAP(Generally accepted accounting principles) only those transactions that are of business nature should be accounted for in the books of a company or any form of business and should not include any personal transaction of the owner and any such personal transactions should be accounted separately and hence the business books of accounts can present a true and fair view.

Key points from the question:-

• Julia operates a lawn care business as a sole proprietorship.
• $85,000 gross income from lawn care (It is a income derived from the business)
• $50 from sale of signed baseball (This is a personal transaction since Julia is a huge baseball fan and as per business entity concept of generally accepted accounting principles, personal transactions should not be included in the business and should be accounted separately not in the books of the business )
• $5,000 gain on the sale of a Company Y stock held for five months.(In the absence of further information as weather this particular investment was done by Julia, personally or by her business we assume it is as personal transaction and hence will exclude it from the calculation of adjusted gross income for 2019)
• Expenses: $20,000 of operating expenses (fuel, repairs on equipment, wages to employees)
• $4,000 for the hats and shirts (Business transaction since the hats and shirts were made for promotion and advertisement of business)
• $100 for ticket to game (This is a personal transaction since Julia is a huge baseball fan and as per business entity concept of generally accepted accounting principles, personal transactions should not be included in the business and should be accounted separately not in the books of the business)
• $10,000 loss on the sale of Company X stock held for six months.(In the absence of further information as weather this particular investment was done by Julia, personally or by her business we assume it is as personal transaction and hence will exclude it from the calculation of adjusted gross income for 2019)

Statement showing calculation of adjusted gross income for 2019. Particulars Amount(USD) Gross income from lawn care 85,000.00 Less: Operating expenses (fuel, repairs on equipment, wages to employees) (20,000.00) Less: Advertisement (4,000.00) Total Adjusted gross income (A-(B+C)) 61,000.00

Note: Another assumption if the gain/loss from the sale of stock is business transaction then the calculation of gross income would have been as below.

Statement showing calculation of adjusted gross income for 2019. Particulars Amount(USD) Gross income from lawn care 85,000.00 Less: Operating expenses (fuel, repairs on equipment, wages to employees) (20,000.00) ess: Advertisement (4,000.00) Gain from sale of Company Y stock 5,000.00 loss on the sale of Company X stock (10,000.00) Total adjusted gross income 56,000.00 U Add: Less: LL