Problem $7-32($Algorithmic$)($LO$.1)$

Monty loaned his friend Ned $$27,000$ three years ago. Ned signed a note and made payments on the loan. Last year, when the remaining balance was $$20,250,$ Ned filed for bankruptcy and notified Monty that he would be unable to pay the balance on the loan. Monty treated the $$20,250$ as a nonbusiness bad debt. Last year, before considering the tax implications of the nonbusiness bad debt, Monty had capital gains of $$8,100$ and taxable income of $$50,750.$ During the current year, Ned paid Monty $$18,225$ in satisfaction of the debt.

Determine Monty's tax treatment for the $$18,225$ received in the current year.

The nonbusiness bad debt of $$20,250$ would have been reported as a $,$ and $ $$ would be included in Monty's gross income this year.