Question

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 must recognize $20,000 ($80,000 - $60,000) of gross income.
b. Meredith must recognize gross income of $20,000 ($80,000 - $60,000) from discharge of the debt.
c. Nicholas is not required to recognize gross income, but must reduce his cost basis in the land to $130,000.
d. Nicholas is not required to recognize gross income, since he paid the debt before it was due.
e. None of these choices are correct.

Answer 1

Answer:

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

Explanation: