Question

Sarah, a majority shareholder in Teal, Inc., made a $200,000 interest-free loan to the corporation. Sarah is not an employee of the corporation.

a. Sarah must recognize imputed interest expense and the corporation must recognize imputed interest income.
b. Sarah must recognize imputed interest income and the corporation must recognize imputed interest expense.
c. Sarah must recognize imputed dividend income and the corporation may recognize imputed interest expense.
d. Neither Sarah's nor the corporation's gross income is affected by the loans because no interest was charged.
e. None of these.

Answer 1

(A). Sarah must recognize imputed interest income and the corporation must recognize imputed interest expense.

Step-by-step explanation: