Harold Bought Land from Jewel for $150,000

question 42

Multiple Choice

Harold bought land from Jewel for $150,000.Harold paid $50,000 cash and gave Jewel an 8% note for $100,000. The note was to be paid over a five-year period.When the balance on the note was $80,000, Jewel began having financial difficulties.To accelerate her cash inflows, Jewel agreed to accept $60,000 cash from Harold in final payment of the note principal.

• A)Harold must recognize $20,000 ($80,000 - $60,000) of gross income.
• B)Harold is not required to recognize gross income but must reduce his cost basis in the land to $130,000.
• C)Harold is not required to recognize gross income since he paid the debt before it was due.
• D)Jewel must recognize gross income of $20,000 ($80,000 - $60,000) from discharge of the debt.
• E)None of these.

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Definitions:

Direct Write-off Approach

An accounting method for dealing with bad debts where specific accounts receivable are written off against income at the time they are determined to be uncollectible.

Normal Balance

The side of an account that is increased, which for assets, expenses, and dividends is the debit side, and for liabilities, equity, and revenue is the credit side.

Financial Statement

A documented account detailing the commercial operations and fiscal outcomes of an enterprise.

Normal Balance

The usual balance of an account based on its classification in the accounting system, typically debit for assets and expenses, and credit for liabilities, equity, and revenue.