16. Mera made an $85,000 interest-free loan to her son, Arthur Curry, Jr., who u

Question

16. Mera made an $85,000 interest-free loan to her son, Arthur Curry, Jr., who used the money to pay off the mortgage on his primary residence and to buy municipal bonds. Arthur's only income for the year is his salary of $55,000 and $1,800 interest income on the bonds. Assume the relevant Federal interest rate is 5% annually. The loan is outstanding for the entire year. (14 points) a.Based on the above information, what is the effect of the loan on Mera's gross income for the year? b In addition to the $85,000 loan in the current year, you discover that Mera made another loan of $25,000 to Arthur in a previous year. Arthur used the funds to set up a pool cleaning business. What are the effects, if any, on Mera's gross income. e What are the effects, if any, on Arthur's income and expenses?

Explanation / Answer

a) Mere's gross income will increase if her give loan to others with interest of 5%. That is the value of $4250

b) Mere's gross income will be increase interest of $1250 (25000*5%) for one year & $1312.50 (26250*5%) for second year. Along with an amount of 4250 which is expected interest from $85000 loan. Mere can demand, a sum of amount from her son's business profit if any for compensating interest free loan.

c) Mr.Arthur's income is $55000 from salary & $1800 from interest. He had saved the interest expenses to Ms.Mera who is given interest free loan. He can give any profit share from his pool cleaning business.

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