Blinder Corporation was having some cash flow problems.One of its creditors agreed to accept $25,000 in payment of a $40,000 debt to help the company out of the jam, even though it is not bankrupt.How does Blinder treat this debt repayment?
A)Blinder has neither income nor loss
B)Blinder must recognize $15,000 of income
C)Blinder must reduce the basis of assets by $15,000
D)Blinder must reduce tax attributes by $15,000

Question

Quizplus · Accepted Answer

Blinder must recognize $15,000 of income because the creditor accepted $25,000 in payment of a $40,000 debt, resulting in a $15,000 gain for Blinder Corporation. This is considered cancellation of debt income, which is generally taxable under the Internal Revenue Code.

Blinder Corporation Was Having Some Cash Flow Problems