Wally is employed as an executive with Pay More Incorporated. To entice Wally to work for Pay More, the corporation loaned him $40,000 at the beginning of the year at a simple interest rate of 1 percent. Wally would have paid interest of $4,800 this year if the interest rate on the loan had been set at the prevailing federal interest rate.

Required:

1. Wally used the funds as a down payment on a speedboat and repaid the $40,000 loan (including $400 of interest) at year-end.

a-1. Does this loan result in any income to either party?

a-2. Indicate the amount below.

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