Wally is employed as an executive with Pay More Incorporated. To entice Wally to work for Pay More, the corporation loaned him $20,000 at the beginning of the year at a simple interest rate of 1 percent. Wally would have paid interest of $2,400 this year if the interest rate on the loan had been set at the prevailing federal interest rate.

a. Wally used the funds as a down payment on a speedboat and repaid the $20,000 loan (including $200 of interest) at year-end.

Does this loan result in any income to either party, and if so, how much?

• Yes

• No

Indicate the amount below.

Pay More $_______

Wally $________

b. Assume instead that Pay More forgave the loan and interest on December 31. What amount of gross income does Wally recognize this year?

Amount to be recognized_________________