Nathan Loans $50,000 to Ramona on January 1 of the Current

question 15

Multiple Choice

Nathan loans $50,000 to Ramona on January 1 of the current year. The terms of the loan require Ramona to pay Nathan $5,000 per year on December 31 each year for the next 10 years (i.e., no interest is charged on the loan) . Assuming that the applicable federal rate is 6% and Ramona has total investment income of $1,200 during the current year:
I.If Ramona is Nathan's sister, Nathan must recognize $3,000 of interest income from the loan.
II.If Ramona is an employee of Nathan's, Nathan must recognize interest income of $3,000 and receives a deduction for compensation paid of $3,000.
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• A)Only statement I is correct.
• B)Only statement II is correct.
• C)Both statements are correct.
• D)Neither statement is correct.