Terry and Jim Are Both Involved in Operating Illegal Businesses

question 94

Multiple Choice

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 the above items in calculating the business profit.
• B)Terry should report profit from his business of $250,000.
• C)Jim should report profit from his business of $500,000.
• D)Jim should report profit from his business of $250,000.
• E)None of the above.

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Definitions:

Labor Rate Variance

The difference between the actual cost of labor and the expected (or standard) cost, indicating efficiency or inefficiency in labor usage.

Direct Labor

Direct labor involves the work of employees that is directly attributable to the production of goods or provision of services, such as manufacturing labor costs.

Materials Price Variance

The deviation between the actual cost of direct materials and the standard cost, multiplied by the quantity purchased.

Variable Overhead Rate

The rate at which variable overhead costs are allocated to a unit of production, often based on direct labor hours or machine hours.