Question

Exercise 4-6 (Algorithmic) (LO. 10) Elizabeth makes the following interest-free loans during the year. The relevant Federal interest rate is 5%, and none of the loans are motivated by tax avoidance. All of the loans were outstanding for the last six months of the tax year. Borrower Amount Borrower's Other Net Investment Income Purpose of Loan Richard $1,750 $0 Gift Woody $2,100 $175 Stock purchase Irene $114,500 $0 Purchase principal residence What are the effects of the imputed interest rules on these transactions? If an amount is zero, enter "0". If required, round your final answer to the nearest dollar. a. Richard subject to the imputed interest rules because the $10,000 exception apply. Elizabeth's gross income from the loan is $ . b. The $10,000 exception apply to the loan to Woody because the proceeds were used to purchase assets. Because the $1,000 exception to this loan, is imputed. Elizabeth's gross income from the loan is $ . c. to the loan to Irene because the loan was for . Elizabeth's gross income from the loan is $ .

Answer 1

Solution:

a.) Richard is not subject to the imputed interest rules because the $10,000 exception does apply.
b.)The $10,000 exception does not apply to the loan to Woody because the proceeds were used to purchase income producing assets. Because the $1,000 exception applies to this loan no interest is imputed.
c.) None of the exceptions apply to the loan to Irene because the loan was for more than $100,000
d.) Calculate the interest income
Interest Income=(Loan amount*(1+Federal rate))*Federal rate*(Outstanding months/Total no of months)
Interest Income = ($100,000*(1+5%))*5%*6/12
Interest Income = $2,625
As a result of these transactions Elizabeth has Interest Income of $2,625.