Question

Five years ago, Firm SJ purchased land for $107,000 with $10,000 of its own funds and $97,000 borrowed from a commercial bank. The bank holds a recourse mortgage on the land. For each of the following independent transactions, compute SJ’s positive or negative cash flow. Assume that SJ is solvent, any recognized loss is fully deductible, and SJ’s marginal tax rate is 21 percent. (Negative amounts should be indicated by a minus sign.)

Required:

1. SJ sells the land for $40,000 cash and the buyer’s assumption of the $80,000 principal balance of the mortgage.
2. SJ sells the land for $120,000 cash and pays off the $80,000 principal balance of the mortgage.
3. SJ sells the land for $85,500 cash and pays off the $80,000 principal balance of the mortgage.

Answer 1

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