FINANCE 101- Computational Exercise

FINANCE 101- Computational Exercise

Subject: Business    / Finance
Question

Computational Exercise (40 points)

Lisbeth makes the following interest-free loans during the year. The relevant federal interest rate is 5%, and none of the loans are motivated by tax avoidance. All of the loans were outstanding for the last 6 months of the tax year. Identify the federal income tax effects of these loans. Note carefully the tax position on each borrower for which you should clearly identify and include discussions on a) the differences between imputed interest and market interest on gift loans, b) the importance of loans between individual and, c) the tax recognition of interest income.

Borrower

Amount

Borrower’s Other Net Investment Income

Purpose of Loan

Richard

$5,000

$800

Gift

Woody

8,000

600

Stock purchase

Irene

105,000

0

Purchase principal residence