Before any debt cancellation, KuhnCo holds business equipment with a fair market value of $1 million and related liabilities of $1.25 million. The lender agrees to cancel $400,000 of the liabilities.
a. How much gross income does KuhnCo report as a result of the debt cancellation?
b. How would your answer change, if at all, had the lender cancelled $200,000 of the debt?