The effects of a below-market loan for $100,000 made by a corporation to its chief executive officer as an enticement to get him to remain with the company are:
A) The corporation has imputed interest income and the employee is deemed to have received a gift.
B) The corporation has imputed interest income and dividends paid.
C) The employee has no income unless the funds are invested and produce investment income for the year.
D) The employee has imputed compensation income and the corporation has imputed interest income.
E) None of these.

Question

Quizplus · Accepted Answer

A below-market loan implies that the interest rate on the loan is lower than the market rate. In this scenario, the corporation is giving the CEO a loan of $100,000 at below-market interest rates to keep him with the company. As a result, the corporation would have imputed interest income because it would be deemed to have earned the market rate of interest on the loan. The employee (CEO), on the other hand, is deemed to have received compensation income in the form of the difference between the market interest rate and the interest actually paid. Therefore, the correct option is D.

The Effects of a Below-Market Loan for $100,000 Made by a Corporation