Tonya Contributes $150,000 to Swan, Inc

question 31

Multiple Choice

Tonya contributes $150,000 to Swan, Inc., for 80% of the stock. In addition, she loans Swan $600,000. The maturity date on the loan is 5 years and the interest rate is 6%, the same as the Federal rate. Which of the following statements are correct?

• A) If the loan is reclassified as equity under § 385, Swan qualifies for a deduction of $600,000 when the loan is repaid, and Tonya receives dividend income of $600,000 (assuming that Swan's earnings and profits are at least $600,000).
• B) If the loan is not reclassified as equity under § 385, Swan can deduct interest expense annually of $36,000, and Tonya includes in gross income annually interest income of $36,000.
• C) If the loan is reclassified as equity under § 385, Swan claims no interest deduction, and Tonya recognizes no income.
• D) Only a. and b.
• E) a., b., and c.

Describe the characteristics and valuation of equity investments.

Understand the concept of non-amortizable debt and its implications on bond repayment.

Identify the common vehicles for debt investments.

Analyze the impact of changes in market interest rates on bond prices.

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Definitions:

Marginal Unit

Refers to the additional or incremental unit of a good or service considered in analysis or decision-making.

Perfect Competition

A market structure characterized by many buyers and sellers, free entry and exit, and a homogeneous product, leading to price-taking behavior.

Market Price

The existing rate at which an asset or service may be acquired or disposed of on the market.

Utility Consumption

The enjoyment or satisfaction gained by using a good or service.