Question

Ed runs an auto repair business out of the garage attached to his personal residence. How should he account for each of the following items?

a. Cash received from repair services, $28,000

b. Interest paid on his home mortgage, $7,300

c. Automotive wrench set purchased at a cost of $1,200

d. Electricity bills, $3,600. (Ed does not have separate electricity service to the garage.)

e. Checks received from customers that were returned by his bank (bed debts), $1,600

f. Telephone bill for phone in the garage, $420. (Ed has a separately listed phone in his house.)

g. Advertising in the local newspaper, $800

h. Interest paid on home furniture loan, $600

Answer 1

Ed must seprate his income and expenses on basis of his auto repair busines and personal.

a. Cash received from repair services, $28,000

It is income from business and should be part of income from auto repair business.

b. Interest paid on his home mortgage, $7,300

As the auto repair garage is attached to his house, Ed needs to allocate a certain portion of amount to the garage as business expense. The remaining portion should be considered as house mortage interest. Allocation can be on any basis.

c. Automotive wrench set purchased at a cost of $1,200

Since automotive wrench is purchased for business it should be capitalized and also be depreciated.

d. Electricity bills, $3,600. (Ed does not have separate electricity service to the garage.)

Ed will again need to allocate certain amount of the bill to the garage and remaining as his personal. As Ed does not have certain electricity for the garage. So he need to allocate between personal use and business use.

e. Checks received from customers that were returned by his bank (bed debts), $1,600

f. Telephone bill for phone in the garage, $420. (Ed has a separately listed phone in his house.)

This can be considered as fully used for business and treated as business expenses.

g. Advertising in the local newspaper, $800

This can be considered as fully used for business and treated as business expenses.

h. Interest paid on home furniture loan, $600

This is not business related expenses but personal expenses. This should should not be considered as business expenses.