Need help with Tax Accounting

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***My question is how do I determine the income recognized?

Jack is a cash basis, calendar year taxpayer.  Jack borrowed $60,000 from Tom in 2010 in a business transaction.  The terms of the loan called for Jack to pay annual interest at 6% with the principle due in December of 2015.  Until 2014, Jack made the required interest payments but, in 2010, did not make any interest payments.  On September 15, 2015, Tom forgave $30,000 of the principle Jack owed, increased the interest rate on the remaining principle to 7½ % and moved the due date of the repayment of the principle to December 2017.

a.  What amount would Jack recognize if, before the forgiveness of debt, Jack’s assets and liabilities were, respectively, $325,000 and $380,000?

b.  What amount of income does Jack recognize from the forgiveness of debt if before the forgiveness he had assets of $315,000 and liabilities of $340,000.

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(Top Tutor) Daniel C.
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