Nello Company owed $23,400 overdue rent to its landlord, Bonview Inc. Because Nello is a desirable tenant, Bonview agreed to settle the overdue account for a $15,000 cash payment from Nello. Both Nello and Bonview are accrual basis taxpayers.
a. What is the tax consequence to Nello of the settlement of its $23,400 account pay-able to Bonview? Compute Nello’s net cash outflow from the settlement assuming its tax rate is 35 percent.
b. What is the tax consequence to Bonview of the settlement of its $23,400 account receivable from Nello? Compute Bonview’s net cash inflow from the settlement assuming its tax rate is 30 percent.