Mercury Is Self-Employed and She Uses a Room in Her

question 108

Essay

Mercury is self-employed and she uses a room in her home as her principal place of business. She meets clients there and doesn't use the room for any other purpose. The size of her home office is 460 square feet. The size of her entire home is 3,500 square feet. During the year, Mercury received $8,700 of gross income from her business activities and she reported $3,300 of business expenses unrelated to her home office. For her entire home in the current year, she reported $4,050 of mortgage interest, $1,490 of property taxes, $1,420 of insurance, $1,370 of utilities and other operating expenses, and $2,300 of depreciation expense. What amount of home office expenses is Mercury allowed to deduct in the current year using the actual expense method? Indicate the amount and type of expenses she must carry over to the next year, if any. What amount of home office expenses is Mercury allowed to deduct in the current year using the simplified method?

---

Definitions:

Contingent Liability

A potential obligation that may arise depending on the outcome of a future event, not recognized on the balance sheet unless occurrence is probable and the amount can be reasonably estimated.

Estimated Liability

A potential financial obligation that may arise in the future, recognized in accounting based on probable expenditures.

Times Interest Earned

A financial ratio that measures a company's ability to meet its debt obligations by comparing its income before interest and taxes (EBIT) to its interest expenses.

Interest Expense

Interest expense is the cost incurred by an entity for borrowed funds, usually expressed in the form of interest payments on loans, bonds, or credit lines.