Question

Five years ago, Firm SJ purchased land for $100,000 with $10,000 of its own funds and $90,000 borrowed from a commercial bank. The bank holds a recourse mortgage on the land. For each of the following independent transactions, compute SJ’s positive or negative cash flow. Assume that SJ is solvent, any recognized loss is fully deductible, and SJ’s marginal tax rate is 35 percent.
a. SJ sells the land for $33,000 cash and the buyer’s assumption of the $80,000 principal balance of the mortgage.
b. SJ sells the land for $113,000 cash and pays off the $80,000 principal balance of the mortgage.
c. SJ sells the land for $82,000 cash and pays off the $80,000 principal balance of the mortgage.
d. SJ defaults on the $80,000 mortgage. The bank forecloses and sells the land at public auction for $64,000. The bank notifies SJ that it will not pursue collection of the $16,000 remaining debt.
e. SJ defaults on the $80,000 mortgage. The bank forecloses and sells the land at public auction for $64,000. The bank requires SJ to pay off the $16,000 remaining debt.


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  • CreatedNovember 03, 2015
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