Question

Ashley had $10,000 in credit card debt. She negotiated a settlement with the credit card company, and the credit card company agreed to cancel $6,000 of the debt.

If Ashley has total assets of $25,000 and total liabilities of $50,000 at the time the debt was cancelled, what amount of gross income does Ashley have as a result of the credit card company cancelling $6,000 of her debt?

Answer 1

The amount waived off by the lender must be treated just like gross income. The total figure for the gross income will be:

Total assets = Equity + Liability

By putting values we have:

$25,000 = Earnings losses (Equity) + $50,000

Earnings Losses = $25,000 - $50,000 = -$25,000

So the Gross losses are $25,000. Now we will reduce this losses by $6000 which is debt cancellation. The Net losses are $19,000 which are trading losses and must be offset against trading income.