11. Wendell is an executive with CFO Tires. At the beginning of this year the co

Question

11. Wendell is an executive with CFO Tires. At the beginning of this year the corporation loaned Wendell $50,000 at an interest rate of one percent. Wally would have paid interest of $2,500 this year if the interest rate on the loan had been set at the prevailing Federal interest rate. Wally used the funds as a down payment on a vacation home and during the year he paid $500 of interest to CFO. On December 31, CFO forgave the loan and remaining interest. What amount of gross income does Wally recognize from the loan this year?

Explanation / Answer

Wally's gross income is $52,500 Forgiveness of debt is equivalent to other income for tax purposes. The $500 interest payment would be deducted when deriving taxable income.

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