Comprehensive Problem 5-88 (LO 5-1, LO 5-2, LO 5-3) (Algo)

[The following information applies to the questions displayed below.] Diana and Ryan Workman were married on January 1 of last year. Diana has an eight-year-old son, Jorge, from her previous marriage. Ryan works as a computer programmer at Datafile Incorporated (DI) earning a salary of $108,500. Diana is self-employed and runs a day care center. The Workmans reported the following financial information pertaining to their activities during the current year.

1. Ryan earned a $108,500 salary for the year.
2. Ryan borrowed $14,500 from DI to purchase a car. DI charged him 2 percent interest ($290) on the loan, which Ryan paid on December 31. DI would have charged Ryan $970 if interest had been calculated at the applicable federal interest rate. Assume that tax avoidance was not a motive for the loan.
3. Diana received $3,250 in alimony and $7,000 in child support payments from her former husband. They divorced in 2016.
4. Diana won a $1,150 cash prize at her church-sponsored Bingo game.
5. The Workmans received $1,750 of interest from corporate bonds and $1,500 of interest from a municipal bond. Diana owned these bonds before she married Ryan.
6. The couple bought 100 shares of ABC Incorporated stock for $65 per share on July 2. The stock was worth $97 a share on December 31. The stock paid a dividend of $1 per share on December 1.
7. Dianas father passed away on April 14. She inherited cash of $75,000 from her father and his baseball card collection, valued at $4,500. As the beneficiary of her fathers life insurance policy, Diana also received $175,000.
8. The couple spent a weekend in Atlantic City in November and came home with gross gambling winnings of $3,700.
9. Ryan received $5,400 cash for reaching 10 years of continuous service at DI.
10. Ryan was hit and injured by a drunk driver while crossing a street at a crosswalk. He was unable to work for a month. He received $11,000 from his disability insurance. DI paid the premiums for Ryan, but it reported the amount of the premiums as compensation to Ryan on his year-end W-2.
11. The drunk driver who hit Ryan in part (j) was required to pay his $4,500 medical costs, $4,000 for the emotional trauma he suffered from the accident, and $10,000 for punitive damages.
12. For meeting his performance goals this year, Ryan was informed on December 27 that he would receive a $7,500 year-end bonus. DI (located in Houston, Texas) mailed Ryans bonus check from its payroll processing center (Tampa, Florida) on December 28. Ryan didnt receive the check at his home until January 2.
13. Diana is a 10 percent owner of MNO Incorporated, a Subchapter S corporation. The company reported ordinary business income for the year of $142,000. Diana acquired the MNO stock two years ago.
14. Dianas day care business collected $160,000 in revenues. In addition, customers owed her $15,500 at year-end. During the year, Diana spent $18,000 for supplies, $14,000 for utilities, $40,000 for rent, and $1,750 for miscellaneous expenses. One customer gave her use of his vacation home for a week (worth $15,000) in exchange for Diana allowing his child to attend the day care center free of charge. Diana accounts for her business activities using the cash method of accounting.
15. Ryans employer pays the couples annual health insurance premiums of $18,000 for a qualified plan.

Comprehensive Problem 5-88 Part 1 and 3 (Algo)

1. Assuming the Workmans file a joint tax return, determine their gross income minus expenses on the daycare business (this is called total income on the Form 1040).

What is the Gross Income?

3. Assuming the Workmans live in California, a community property state, and that Diana and Ryan file separately, what is Ryans gross income minus expenses on the daycare business?

What is the Gross Income?