Nicholas bought land from Meredith for $150,000. Nicholas paid $50,000 cash and gave Meredith an 8% note for $100,000. The note was to be paid over a five-year period. When the balance on the note was $80,000, Meredith began having financial difficulties. To accelerate her cash inflows, Meredith agreed to accept $60,000 cash from Nicholas in final payment of the note principal.

Nicholas bought land from Meredith for $150,000. Nicholas paid $50,000 cash and gave Meredith an 8% note for $100,000. The note was to be paid over a five-year period. When the balance on the note was $80,000, Meredith began having financial difficulties. To accelerate her cash inflows, Meredith agreed to accept $60,000 cash from Nicholas in final payment of the note principal.

Nicholas bought land from Meredith for $150,000. Nicholas paid $50,000 cash and gave Meredith an 8% note for $100,000. The note was to be paid over a five-year period. When the balance on the note was $80,000, Meredith began having financial difficulties. To accelerate her cash inflows, Meredith agreed to accept $60,000 cash from Nicholas in final payment of the note principal.


a. Nicholas is not required to recognize gross income, since he paid the debt before it was due.

b. Nicholas must recognize $20,000 ($80,000 - $60,000) of gross income.

c. Meredith must recognize gross income of $20,000 ($80,000 - $60,000) from discharge of the debt.

d. Nicholas is not required to recognize gross income, but must reduce his cost basis in the land to $130,000.

e. None of these choices are correct.


Answer: d. Nicholas is not required to recognize gross income, but must reduce his cost basis in the land to $130,000.



Learn More :