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.

A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Question

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.
​
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Quizplus · Accepted Answer

The Answer of 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.
​
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

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