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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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(Appendix 14.1)Pamlico Company has a $500,000, 15%, 3-year note dated January 1, 2019, payable to Forest National Bank. On December 31, 2020, the bank agreed to settle the note and unpaid interest of $75,000 for $50,000 cash and marketable securities having a current market value of $375,000. Pamlico’s acquisition cost of the securities is $385,000. Ignoring income taxes, what amount should Pamlico report as a gain from the debt restructuring on its 2020 income statement?

  1. a. $65,000
  2. b. $75,000
  3. c. $140,000
  4. d. $150,000

To determine

Calculate the gain from debt restructuring on the 2020’s income statement.

Explanation

Troubled Debt Restructuring:

A troubled debt restructuring happens if a creditor, for legal or economic reasons associated to a debtor’s financial complications, grants a concession to a debtor that would not be otherwise considered.

Compute the gain from debt restructuring:

Gainfromdebtrestructuring=(BookvalueofnotepayableValueofnewpaymentsandassets)=$575,000(1)$425,000(2)=$150,000

Therefore, according to the above calculation, Option d. $150,000 is the correct option and the other options of a, b and c are incorrect

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