Question

Mandarin Company bought land for $100,000 that it held for a possible future plant site. Mandarin Company bought the property for $20,000 cash payment and by signing a note secured by a mortgage on the land in the amount of $80,000.

Property values in the area increased significantly. When the land was worth, $300,000, Mandarin Company took out a new mortgage of $250,000 and paid off the $100,000 existing mortgage loan.

Property values in the area then decreased a great deal, and Mandarin Company could no longer make the payments on the mortgage. When Mandarin Company’s land had a fair market value of $175,000, the lender foreclosed on the mortgage. The lender forgave the entire debt because of Mandarin Company’s deteriorating financial condition.   The balance of the mortgage at the time of the foreclosure was $190,000 but Mandarin Company was not bankrupt or insolvent.

How much gain or loss did Mandarin Company realize on the foreclosure? How much, if any, gain or loss must it recognize? How much gross income does Mandarin Company recognize as income from the discharge of indebtedness?

Required: The memo should include the facts, issue, conclusion and discussion on your answer.  

Answer 1

How much gain or loss did Mandarin Company realize on the foreclosure? Answer would be $ 15,000 as calculated below

How much, if any, gain or loss must it recognize? It must recognize gain of $ 190,000

How much gross income does Mandarin Company recognize as income from the discharge of indebtedness? As per Topic no. 431, gross income would be difference between FMV and outstanding amount, that is $ 15000.

1. Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable immediately after the transfer of property	$ 190000
2. Enter the fair market value of the transferred property	$ 175000
3. Ordinary income from the cancellation of debt upon foreclosure or repossession.* Subtract line 2 from line 1.	$ 15000

1.

2. ..................

If less than zero, enter zero. Next, go to Part 2 ...............................................