[omalloy]

If the book value of the note is greater than the book value of the machine, then why is this transaction is considered a gain, and not a loss? Please explain.

On October 15, 20X1, Kam Corp. informed Finn Co. that Kam would be unable to repay its $100,000 note due on October 31 to Finn. Finn agreed to accept title to Kam’s computer equipment in full settlement of the note. The equipment’s carrying value was $80,000 and its fair value was $75,000. Kam’s tax rate is 30%. What amounts should Kam report as ordinary gain/loss and extraordinary gain for the year ended September 31, 20X2?

…the difference between the carrying value of the debt, $100,000, and the carrying value of the machine, $80,000, which is a $20,000 gain.

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[Anonymous]

What's the answer? Are you taking the tax effect into account? Extraordinary gains are reported net of tax so it would be 14,000.

[mla1169]

It would be a loss to Finn but a gain to Kam. If you owe $100k but the co you owe money to accepts $80k, you've got a gain.

I think you're just thinking from the side of the lender but the question is asking about the borrower.

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[omalloy]

Yes! Thank you I get it now. I am working hard on learning to read questions with more care.

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[Author]

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