Wendell is an executive with CFO Tires. At the beginning of this year the corporation loaned Wendell $50,000 at an interest rate of 1 percent. Wendell would have paid interest of $2,500 this year if the interest rate on the loan had been set at the prevailing federal interest rate. Wendell used the funds as a down payment on a vacation home, and during the year he paid $500 of interest to CFO. On December 31, CFO forgave the loan and remaining interest. What amount of gross income does Wendell recognize from the loan this year?
What will be an ideal response?
$52,000
Wendell must include $2,000 in gross income from the discounted interest rate he received on the loan ($2,500 interest at federal rate minus $500 he actually was required to pay). Also, Wendell must include the $50,000 in gross income because the discharge of the debt is additional compensation.
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