Question

Farhad canceled a note issued by Emma (Farhad's niece) that arose in connection with the sale of property. At the time of the cancellation, the note had a basis to Farhad of $30,000, a face amount of $55,000, and a fair market value of $42,000.
Presuming that the initial sale by Farhad qualified as an installment sale, how much gain does the cancellation result in for Farhad?

Answer 1

Since, firstly Farhad cancelled the note payable which have a value of $30,000 and market value of $42,000, hence Farhad experiences a gain of $12,000.

Calculation:

Face value of notes payable = $55,000

Value to be paid by Emma on notes payable = $30,000

Market price = $42,000

Gain experienced by Farhad = $42,000-$30,000 = $12,000

Written promissory notes are known as notes payable. A borrower receives a certain sum of money from the a lender under this arrangement and agrees to pay it back over a specified time frame. The interest rate may be set for the duration of the note or it may change in accordance with the interest rate the lender charges its most valuable clients (known as the prime rate). In contrast to an account payable, which requires the payment of both interest and a promissory note, this is different.

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