Jimmy has fallen on hard times recently. Last year he borrowed $348,000 and adde
ID: 2420986 • Letter: J
Question
Jimmy has fallen on hard times recently. Last year he borrowed $348,000 and added an additional $84,500 of his own funds to purchase $432,500 of undeveloped real estate. This year the value of the real estate dropped dramatically, and Jimmy’s lender agreed to reduce the loan amount to $327,400.
For each of the following independent situations, indicate the amount Jimmy must include in gross income: (Leave no answer blank. Enter zero if applicable.)
The real estate is worth $268,900 and Jimmy has no other assets or liabilities.
The real estate is worth $337,250 and Jimmy has no other assets or liabilities.
The real estate is worth $291,900 and Jimmy has $52,300 in other assets but no other liabilities.
Question:
Amount includible for Scenario A______
Amount includible for Scenario B______
Amount includible for Scenario C______
Jimmy has fallen on hard times recently. Last year he borrowed $348,000 and added an additional $84,500 of his own funds to purchase $432,500 of undeveloped real estate. This year the value of the real estate dropped dramatically, and Jimmy’s lender agreed to reduce the loan amount to $327,400.
Explanation / Answer
Situation A : The real estate is worth $268,900 and Jimmy has no other assets or liabilities.
Answer : Amount includible for Scenario A = 0
Jimmy recognizes no income. The loan reduction generates $20,600 (348000 - 327,400) of income from discharge of indebtedness, but Jimmy can exclude this income because he is insolvent even after the discharge (assets of $268,900versus liabilities of $327,400).
Situation B : The real estate is worth $337,250 and Jimmy has no other assets or liabilities.
Answer : Amount includible for Scenario B = $ 10,150
. [$10,150 ]
Jimmy recognizes $10,150 of income. The loan reduction generates $20,600 (348000 - 327,400) of income from discharge of indebtedness.Jimmy can only exclude $9850( $337,250- $ 327,400)of this income because he becomes solvent after this amount of discharge (assets of $337,250versus liabilities of $327,400).
SItuation :3
The real estate is worth $291,900 and Jimmy has $52,300 in other assets but no other liabilities.
Answer :
Amount includible for Scenario C = $ 16,800
$ 16,800
Jimmy recognizes $16,800 of income. The loan reduction generates $20,600 (348000 - 327,400)of income from discharge of indebtedness, and Jimmy is insolvent before the cancellation of indebtedness (assets of $344,200 versus liabilities of $348,000) but he is solvent by $16,800 after the cancellation of debt ($344,200 assets and $327,400of debt).
Situation B : The real estate is worth $337,250 and Jimmy has no other assets or liabilities.
Answer : Amount includible for Scenario B = $ 10,150
. [$10,150 ]
Jimmy recognizes $10,150 of income. The loan reduction generates $20,600 (348000 - 327,400) of income from discharge of indebtedness.Jimmy can only exclude $9850( $337,250- $ 327,400)of this income because he becomes solvent after this amount of discharge (assets of $337,250versus liabilities of $327,400).
SItuation :3
The real estate is worth $291,900 and Jimmy has $52,300 in other assets but no other liabilities.
Answer :
Amount includible for Scenario C = $ 16,800
$ 16,800
Jimmy recognizes $16,800 of income. The loan reduction generates $20,600 (348000 - 327,400)of income from discharge of indebtedness, and Jimmy is insolvent before the cancellation of indebtedness (assets of $344,200 versus liabilities of $348,000) but he is solvent by $16,800 after the cancellation of debt ($344,200 assets and $327,400of debt).
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