Question

Amber Machinery Company purchased a building from Ted for $250,000 cash and a mortgage of $750,000. One year after the transaction, the mortgage had been reduced to $725,000 by principal payments by Amber, but it was apparent that Amber would not be able to continue to make the monthly payments on the mortgage. Ted reduced the amount owed by Amber to $600,000. This reduced the monthly payments to a level that Amber could pay. Amber must recognize $125,000 income from the reduction in the debt by Ted.

A. True
B. False

Answer 1

No, the statement is false. Amber must recognize $125,000 income from the reduction in the debt by Ted.

Step-by-step explanation:

No, the statement is false. Amber must recognize $125,000 income from the reduction in the debt by Ted.

When Ted reduced the amount owed by Amber from $725,000 to $600,000, it resulted in a cancellation of debt of $125,000 ($725,000 - $600,000). According to the tax law, canceled debts are generally considered taxable income, unless certain exceptions apply.

Therefore, Amber is required to recognize the canceled debt as income and report it on their tax return.