Diamond Company was experiencing financial difficulties, but was not bankrupt or insolvent. The American Bank, which held a mortgage on other real estate owned by Diamond, reduced the principal from $110,000 to $85,000. The bank had made the loan to Diamond when it purchased the real estate from Aquamarine, Inc. Indigo, Inc., the holder of a mortgage on Diamond's building, agreed to accept $40,000 in full payment of the $55,000 due. Indigo had sold the building to Diamond for $150,000 that was to be paid in installments over 8 years. As a result of the above, Diamond must:
a. include $25,000 in gross income and reduce its basis in its assets by $15,000.
b. include $40,000 in gross income.
c. include $15,000 in gross income and reduce its basis in the building by $25,000.
d. reduce the basis in its assets by $40,000.
e. None of these choices are correct.
Answer: a. include $25,000 in gross income and reduce its basis in its assets by $15,000.