Problem 7-33 (Algorithmic) (LO. 1)

Monty loaned his friend Ned $11,000 three years ago. Ned signed a note and made payments on the loan. Last year, when the remaining balance was $8,800, Ned filed for bankruptcy and notified Monty that he would be unable to pay the balance on the loan. Monty treated the $8,800 as a nonbusiness bad debt. Last year, before considering the tax implications of the nonbusiness bad debt, Monty had capital gains of $3,520 and taxable income of $38,500. During the current year, Ned paid Monty $7,920 in satisfaction of the debt.

Determine Monty's tax treatment for the $7,920 received in the current year.

The nonbusiness bad debt of $8,800 would have been reported as a

short-term capital losslong-term capital lossordinary lossshort-term capital loss

, and $fill in the blank 2 would be included in Monty's gross income this year.