Kathy is a college student who has big ideas but often fails to follow through o

Question

Kathy is a college student who has big ideas but often fails to follow through on those ideas.  Kathy borrowed $85,000 to pay for his tuition, books, and room and board. Kathy is required to pay the money back to the bank, along with 6% interest, within 24 months of graduating. 2017 will be Jim’s 6th year as a full-time student at ASU and the bank is concerned about Kathy’s lack of motivation to graduate and find a job so he can repay the loan. The bank meets with Kathy and agrees that if she graduates in 2017, the bank will forgive $30,000 of the debt.  Kathy is so grateful for the bank working with him on the loan and promptly completes her general studies degree by the end of 2017. Over the next 24 months, Kathy works hard and pays the bank $55,000. At that time, the bank confirms in writing that the $30,000 of debt is forgiven. At the time of the forgiveness, Kathy had $20,000 of assets and no debts other than the $30,000 from the bank loan.

How much income (if any) must Kathy report as a result of this transaction? Be sure to explain your answer and provide citations where relevant.

Explanation / Answer

Since Mike took $35,000 and the bank forgiven that amount. He did not have to pay that amount. So that is his income. In addition to that 6% interest which he would have paid on that $35,000 is also his income.

So, Interest for 24 months = PV of $2,100 p.a. (i.e. 6% of $35,000) for 2 years @6% discount rate (assumption)

=$2,100×1.8334

= $3,850.14

So, total income is $38,850.14 ($35,000+$3,850.14)

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