From the records of Tom, a cash basis sole proprietor, the following information was available: What amount should Tom report as net earnings from self-employment?

Question

Quizplus · Accepted Answer

To calculate the net earnings from self-employment, we need to add the gross receipts and other income and subtract the allowable deductions. 
Gross receipts and sales: $33,000 
Cost of goods sold: $11,200 
Other expenses: $9,500 
Other income (from investments): $1,100

Net earnings from self-employment = Gross receipts and sales – Cost of goods sold – Other expenses = $33,000 – $11,200 – $9,500 = $12,300 
However, we also have to subtract the one-half of self-employment tax, which is ($12,300 x 0.9235 x 0.153 = $1,374). 
Therefore, the net earnings from self-employment would be $12,300 – $1,374 = $10,926. Since this is a cash basis sole proprietor, we also need to consider the cash received during the year. Therefore, the other income of $1,100 has already been included in the gross receipts of $33,000. 
Hence, the net earnings from self-employment is $11,300, which is the closest option to our calculated value. Therefore, the correct answer is B.

From the Records of Tom, a Cash Basis Sole Proprietor