Discuss whether Abbies receipt of her share of the proceeds from the sale of the land constituted
Question:
Discuss whether Abbie’s receipt of her share of the proceeds from the sale of the land constituted ordinary income
As well as working as an employee, Abbie also owns a private business (as a sole trader) that offers tax consulting services for clients. She had a friend called Peter who ran a clothing store (as a sole trader). Peter’s business owned the retail store premises, as well as the land it was located on. Two years ago, Peter’s store was struggling to make money. As a result, Abbie’s business lent Peter’s business $200,000 at 5% annual interest.
However, a year after the loan was made, it became clear that the business could not repay the loan. As a result, Abbie and Peter came to an agreement: in exchange for Abbie’s business forgiving the debt, Abbie’s business would take a 40% interest in the land that the premises were located on. This agreement also made it clear that the land would be sold in the near future. Consequently, the shop was demolished. Also, council plans were obtained to build an 8-storey apartment. This involved Abbie’s and Peter’s businesses paying a collective total of $40,000 for an architect, lawyer and local council fees. The land was then sold to a developer for $1 million through a real estate agent.
Financial Accounting an introduction to concepts, methods and uses
ISBN: 978-0324789003
13th Edition
Authors: Clyde P. Stickney, Roman L. Weil, Katherine Schipper, Jennifer Francis