Question

Cary is experiencing cash flow problems during the current year. Rather than foreclose an $80,000 business loan, his bank agrees to reduce the debt to $50,000. Prior to the debt reduction, Cary's total assets were $500,000 and his total liabilities were $510,000. How much income must Cary recognize from the reduction of his bank loan? a. - 0 - b. $10,000 c. $20,000 d. $30,000

Answer 1

Answer:d. $30,000

Explanation:

The reduction of loan amount from $80,000 to $50,000 means carry has gained the difference of $30,000 by paying less than the value of loan he has received.

On an overall analysis the net asset will improve from -$10,000 to $20,000 but the income from the loan reduction is $30,000 i.e,$80,000 minus $50,000.

Answer 2

Answer:

Reduction in debt = Existing Loan - Reduced loan

                              = $80,000 - $50,000

                              = $30,000

The income to recognize from the reduction in loan = $30,000

Explanation:

The $30,000 reduction in loan is a saving to the company. Thus, it should be recognized as an income by Cary. Reduction in liability is an inflow to the company.