Reference no: EM131896202

Question - The Brock's business, Westchester Wood, has the following income and expenses.

Income:
Receipts from sales of unfinished furniture	$65,000
Receipts from services to stain/paint furniture	12,000
Receipts from sales of paint and stain products	1,000
Expenditures:
Cost of furniture	$38,000
Cost of stains and paints	2,500
Depreciation expense on building	7,000
Advertising	1,200
Auto expenses (delivering furniture)	900
Loading dock (new)	22,000
Utilities	6,000
Insurance	3,500
Labor (to stain/paint furniture)	9,800
Property taxes	5,000
Delivery truck (used truck)	9,500
Bank fees	2,000
Telephone	2,500
Computer	1,300
Meals and entertainment	1,800
Accounting	6,000
Landscaping	2,400
Maintenance	1,200

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.