Flora Company Owed $95,000, a Debt Incurred to Purchase Land

question 21

Multiple Choice

Flora Company owed $95,000, a debt incurred to purchase land that serves as security for the debt.

• A) If Flora had borrowed the funds from a bank, the bank accepts $85,000 in full payment of the debt, and Flora is solvent after the transfer, Flora does not recognize income, but the company must reduce the cost of the land by $10,000.
• B) If Flora had borrowed the funds from a bank, and the bank accepts $85,000 in full payment of the debt, when the value of the property is $80,000, Flora can deduct a loss.
• C) If Flora transfers to the bank other property, with a basis of $90,000 and a fair market value of $95,000, in full payment of the debt, Flora can recognize a $5,000 loss.
• D) If the $95,000 is owed to the person who sold the property to Flora, and the creditor accepts $85,000 in full payment for the debt, Flora does not recognize gain but must reduce its basis in the land.
• E) None of these.

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Definitions:

Replacement Chain

A capital budgeting decision tool that compares different projects or investments with unequal lifespans by calculating their equivalent annual costs or benefits.

Profitability Index

A financial metric used to measure the relative profitability of an investment, calculated as the present value of future cash flows divided by the initial investment.

Discount Rate

The discount rate utilized in determining the present value of future cash flows through discounted cash flow (DCF) analysis.

NPV

Net Present Value, a method used in capital budgeting to evaluate the profitability of an investment by calculating the present value of expected cash flows minus the initial cost.