Grand Rapids Company paid $250,000 cash in full settlement of a $275,000 debt. Before the payment, its assets were worth $375,000, and its debt equaled $345,000. How much debt relief must the company include in gross income if it is undergoing Chapter 11 bankruptcy organization?
To determine the amount of debt relief that Grand Rapids Company must include in gross income during Chapter 11 bankruptcy organization, we need to calculate the difference between the amount of the debt settled and the fair market value of the assets before the payment.
1. Start by finding the difference between the amount of the debt settled and the fair market value of the assets:
Debt Relief = Debt Settled - Fair Market Value of Assets
Debt Relief = $275,000 - $375,000
Debt Relief = -$100,000
Since the debt relief amount is negative, it means that the company settled the debt for less than the value of the assets. In this case, the company will have debt relief for tax purposes. However, whether this debt relief will be included in the company's gross income during Chapter 11 bankruptcy depends on the specific tax regulations and treatment of debt discharge in bankruptcy.
It is recommended to consult a tax professional or accountant who is familiar with bankruptcy tax laws to determine the correct treatment of debt relief in this particular situation.