Comprehensive Problem 3-1

Ken (birthdate July 1, 1989) and Amy (birthdate July 4, 1991) Both have brought you the following information regarding their income, expenses, and withholding for the year. They are unsure which of these items must be used to calculate taxable income.

Income:
Ken's salary (salesman)	$28,700
Amy's wages (part-time nurse)	17,600
Insurance reimbursement for repairs from an auto accident	500
Gift from Uncle George	2,000
Interest income from Lodge State Bank	906
Federal income taxes withheld:
From Ken's salary	2,800
From Amy's wages	650

Amy owns and operates a computer bookstore named "The Disk Drive". The store is located at 2000 Broadway Street, Menomonie, WI 54751. During 2020, Amy had the following income and expenses:

Sales of books	$321,450
Expenses
Store rental	16,000
Office expense	6,067
Advertising	11,711
City business license	1,020
Payroll	83,550
Payroll taxes	8,400
Utilities	8,050
Other	3,000
Beginning inventory	$75,000
Purchases	191,000
Ending inventory	80,000

Amy treats inventory as non-incidental materials and supplies.

This year, Amy loaned a friend $10,000 so that he could make an investment. Instead of making the investment, the friend lost all the money gambling and left for parts unknown. Amy has no hope of ever collecting on this bad debt.

Ken, who ordinarily never gambles, won $20,677 at a casino birthday party for one of his friends.

The Booths provide the sole support for Ken's parents, Rod (Social Security number 124-80-8050) and Mary (Social Security number 489-37-6673) Booth, who live in their own home. Ken and Amy live at 2345 Wilson Avenue, Menomonie, WI, 54751, and their Social Security numbers are 343-75-3456 (Ken) and 123-45-7890 (Amy). Ken and Amy can claim a $500 other dependent credit for each parent. Ken and Amy received a $2,400 EIP in 2020.

Required: Complete the Booth's Form 1040 and the related schedules and forms provided. Assume the taxpayers had full-year health coverage and neither taxpayer wants to contribute to the presidential election campaign.

A statement is required to be attached to a return for a nonbusiness bad debt, but this requirement may be ignored for this problem. You may ignore any related self-employment taxes. Assume no 1099-B is filed in association with the bad debt when filling out Form 8949.

• You may need to complete the other forms before completing the Form 1040.
• If an amount box does not require an entry or the answer is zero, enter "0".
• If required, round amounts to the nearest dollar.
• Enter all amounts as positive numbers. However, if required, use the minus sign to enter a "loss".

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