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During 2011, Becky loans her brother Ken $5000, which he intends to use to establish a small business. Ken has no other assets and needs cash to expand the business. The agreement provides that Ken will repay the debt if and when sufficient funds are generated from the business. No interest rate is agreed upon. The business is unsuccessful and Ken is forced to file for bankruptcy in 2012. Buy the end of 2012, it is estimated that the creditors will receive only 30% of the amount owed. In 2013 the bankruptcy proceedings are closed, and the creditors receive 10% of the amount due on the debt. What is Becky's bad debt deduction for 2012? For 2013? What form(s) are used to record the bad debt on her tax return?

I'm confused if the 30% and 10% to be paid back to the creditors goes to the bankruptcy filing or if the creditors is Becky? And does the amount matter for the percent of 30% or if it was greater? I'm confused about if Ken owes his sister or not. The loan doesn't seem very clear and they have a close relationship. I was also trying to determine if schedule D and 1040x are needed besides 1040. Could you please describe the reason of the answer so I can better understand the information.

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  • Category:- Accounting Basics
  • Reference No.:- M942201

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