Question

Gold Company was experiencing financial difficulties, but was not bankrupt or insolvent. The National Bank, which held a mortgage on other real estate owned by Gold, reduced the principal from $110,000 to $85,000. The bank had made the loan to Gold when it purchased the real estate from Silver, Inc. Pink, Inc., the holder of a mortgage on Gold’s building, agreed to accept $40,000 in full payment of the $55,000 due. Pink had sold the building to Gold for $150,000 that was to be paid in installments over 8 years. As a result of the above, Gold must:____________

a. Include $40,000 in gross income.
b. Reduce the basis in its assets by $40,000.
c. Include $25,000 in gross income and reduce its basis in its assets by $15,000.
d. Include $15,000 in gross income and reduce its basis in the building by $25,000.
e. None of these.

Answer 1

c. Include $25,000 in gross income and reduce its basis in its assets by $15,000.

Step-by-step explanation:

The computation is shown below:

Decrease by Bank

= $110000 - $85000

= $25,000

The same amount i.e. $25,000 would be involved in the gross income

And, the reduction in mortgage is

= $55000 - $40000

= $15,000

It redued the building or assets basis

hence, the correct option is c. and the same is to be considered