Question

Exercise 4-24 (Algorithmic) (LO. 4) Elizabeth made the following interest-free loans during the year. Assume that tax avoidance is not a principal purpose of any of the loans. Assume that the relevant Federal rate is 5% and that the loans were outstanding for the last six months of the year. Borrower's Net Investment Income Borrower Amount Purpose of Loan Gift Richard $4,250 $0 Woody $450 $5,100 $153,500 Purchase stock Purchase residence $0 Irene What are the effects of the imputed interest rules on these transactions? Compute Elizabeth's gross income from each loan. If an amount is zero, enter "0". If required, round your final answer to the nearest dollar. a. Richard subject to the imputed interest rules because the $10,000 gift loan exception bpply. Elizabeth's gross income from the loan is s Þ. The $10,000 exception apply to the loan to Woody because the proceeds were used to purchase assets. Although the $100,000 exception to this loan, the amount of imputed interest is Elizabeth's gross income from the loan is $ Elizabeth's gross income from the loan is $ to the loan to Irene because the loan was for Soto Settings to activate Win

Answer 1

Step : 1 of 4

Exemptions and limitation of imputed interest

No interest is imputed on total outstanding gift loan of $10,000 or less, unless the loan proceeds are used for purchase of income proceeding asset. On loans of $100,000 between individuals,no interest is imputed if the borrower's net investment income does not exceed $1,000.

Step : 2 of 4

a) In this situation,gift made to R amounting to 10,000 is exempted from imputed interest rules because of exemption rule. No interest is imputed for R's net investment income of $0 because it is less than$ 1,000 exemption rule for investment income.

Step : 3 of 4

b) In this situation, the$10,000 exemption does not apply to the loan of W because the amount ascertained was used to purchase income producing asset. But under $100,000 exception, no interest is imputed for $5,100 because W's net investment income is lesser than $1,000.

Step : 4 of 4

c) In this situation, No exception is applicable for loan to I because the loan of $ 1,53,500 is more than the exception level of $ 1,00,000. So E will recognise interest income compounded semi annually as shown below :

First 6 months = $ 1,53,500 × 0.05×1/2 year

= $ 3,837.5

Second 6 months = ( $ 1,53,500 + 3,837.5 )×0.05×1/2 year

=$ 3,933.4375

Hence,it is ascertained that the total imputed interest for the last 6 months of E's gross income accounts for $3,934