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Before any debt cancellation, the insolvent KuhnCo holds business equipment, its only asset, with a fair...

Before any debt cancellation, the insolvent KuhnCo holds business equipment, its only asset, with a fair market value of $1 million and related liabilities of $1.25 million. The lender agrees to cancel $400,000 of the liabilities. KuhnCo has no other liabilities. a. How much gross income does KuhnCo report as a result of the debt cancellation? b. How would your answer change, if at all, had the lender cancelled $200,000 of the debt?

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Answer #1

SOLUTION:

**Gross income reported= Equipment fair market value + Cancelled liabilities - Related existing Liabilities

(a) Gross income reported as a result of the debt cancellation

Gross income = $(1,000,000 + 400,000 - 1,250,000) = $150,000

(b) gross income reported by KuhnC as a result of the debt cancellation being $200000.

Gross income = $(1,000,000 + 200,000 - 1,250,000) = - $50,000 (gross loss)

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