Milton is experiencing cash flow problems during the current year.Rather than foreclose on the $120,000 mortgage loan on his principal residence,his bank agrees to reduce the debt to $90,000.Prior to the debt reduction,Milton's total assets were $400,000 and his total liabilities were $390,000.How much income must Milton recognize from the reduction of his bank loan?

Question

Quizplus · Accepted Answer

Milton is insolvent before the debt reduction because his liabilities ($390,000) exceed his assets ($400,000) by $10,000. Under the insolvency exception, he does not have to recognize income from the debt reduction up to the amount of insolvency. Since the debt reduction is $30,000 and he is insolvent by $10,000, he does not recognize any income.

Milton Is Experiencing Cash Flow Problems During the Current Year