Jarvie loves to bike. In fact, he has always turned down better paying jobs to work in bicycle shops where he gets an employee discount. At Jarvie’s current shop, Bad Dog Cycles, each employee is allowed to purchase four bicycles a year at a discount. Bad Dog has an average gross profit percentage on bicycles of 25 percent. During the current year, Jarvie bought the following bikes:
| Description | Retail Price | Cost | Employee Price | |||
| Specialized road bike | $ | 6,200 | $ | 4,150 | $ | 4,340 |
| Rocky Mountain mountain bike | 7,500 | 5,750 | 6,000 | |||
| Trek road bike | 3,800 | 2,800 | 2,660 | |||
| Yeti mountain bike | 3,200 | 2,650 | 2,560 | |||
a. What amount is Jarvie required to include in taxable income from these purchases?
b. What amount of deductions is Bad Dog allowed to claim from these transactions?
