On December 31, 2012, Nolte Co. is in financial difficulty and cannot pay a note
ID: 2343261 • Letter: O
Question
On December 31, 2012, Nolte Co. is in financial difficulty and cannot pay a note due that day. It is a $1,800,000 note with $180,000 accrued interest payable to Piper, Inc. Piper agrees to accept from Nolte equipment that has a fair value of $930,000, an original cost of $1,440,000, and accumulated depreciation of $690,000. Piper also forgives the accrued interest, extends the maturity date to December 31, 2015, reduces the face amount of the note to $750,000, and reduces the interest rate to 6%, with interest payable at the end of each year.
Nolte should recognize a gain or loss on the transfer of the equipment of
a. $0.
b. $120,000 gain.
c. $180,000 gain.
d. $570,000 loss.
Nolte should recognize a gain on the partial settlement and restructure of the debt of
a. $0.
b. $45,000.
c. $165,000.
d. $225,000.
Explanation / Answer
Answer:
A) Nolte should recognise (c ) gain of 180,000 on trtansferred for the equipment as calculated below:
B)
As per GAAP one can recognise gain on rerstrtucturing of Paybles only if Future cash Payments < Carrying Value of Paybles 1 Carrying Value of Notes Payble after Equipment Exchange Carrying Valye before echange 19,80,000 ( 18,00,000 +180,000 ) Less:- Fair Value of Equipment -930000 10,50,000 2 Future Cash Payments towards Notepayble ( 10,50,000 + 6% interest on principle ) More than 10,50,000 Hence, Nolte should not recognises any gain of restructuring of debt Ans:- a. $0Related Questions
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