Question

Deerwood Corporation lends its principal shareholder, Lafayette, $500,000 on July 1 of the current year. The loan is interest-free and payable on demand. On December 31, the imputed interest rules are applied. Assume that the Federal rate is 3%, compounded semiannually. What are the tax consequences of this loan?

Answer 1

$7,500

Step-by-step explanation:

Data provided as per the question below:-

Principal amount = $500,000

Rate of interest = 3%

The computation of tax consequences of this loan is shown below:-

Interest from July 1 to 31 December (6 month) = Principal amount × Rate of Interest × semiannually

= $500,000 × 3% × 6 ÷ 12

= $500,000 × 3% × 0.5

= $15,000 × 0.5

= $7,500