Question

During 20X5 Peterson Company experienced financial difficulties and is likely to default on a $500,000, 15%, three-year note dated January 1, 20X4, payable to Forest National Bank. On December 31, 20X5, the bank agreed to settle the note and unpaid interest of $75,000 for 20X5 for $50,000 cash and marketable securities having a current market value of $375,000. Peterson's acquisition cost of the securities is $385,000. Ignoring income taxes, what amount should Peterson report as a gain from the debt restructuring in its 20X5 income statement

Answer 1

Answer:

The amount that Peterson should report as a gain from the debt restructuring in its 20X5 income statement is $150,000.

Explanation:

This can be calculated as follows:

Details                                                                       Amount ($)  

Principal                                                                      500,000

Interest accrued                                                            75,000  

Net carrying amount                                                  575,000

Settlement price:

Cash                                                                            (50,000)

Current market value of marketable securities      (375,000)  

Gain from debt restructuring                                   150,000  

Therefore, the amount that Peterson should report as a gain from the debt restructuring in its 20X5 income statement is $150,000.

Note: The gain calculated above is a gain before tax. The applicable tax rate to Peterson Company in its country of operation has to be used by it to determine its gain after tax.