Question

Sharon made a $60,000 interest-free loan to her son, Todd, who used the money to start a new business. Todd’s only sources of income were $25,000 from the business and $490 of interest on his checking account. The relevant Federal interest rate was 5%. Based on the above information:a.Todd’s business net profit will be reduced by $3,000 (.05 × $60,000) of interest expense.b.Sharon must recognize $3,000 (.05 × $60,000) of imputed interest income on the below- market loan.c.Todd’s gross income must be increased by the $3,000 (.05 × $60,000) imputed interest income on the below market loan.d.Sharon does not recognize any imputed interest income and Todd does not recognize any imputed interest expense.e.None of the above is correct.

Answer 1

Answer:

D) Sharon does not recognize any imputed interest income and Todd does not recognize any imputed interest expense.

Explanation:

If it is well established in a legal document that Sharon lent her son Todd the $60,000 as a interest free loan, then Sarah is able to not recognize any interest income and Todd doesn't have to recognize any interest expense. But if Todd decides to lower his taxable income by recognizing the relevant federal interest rate, then Sharon has to recognize that interest as revenue.