Troubled debt restructuring gain calculation

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    Topic
  • #203162
    BenB
    Participant

    Ace Corp. entered into a troubled debt restructuring agreement with National Bank. National agreed to accept land with a carrying amount of $75,000 and a fair value of $100,000 in payment and cancellation of a note (from Ace) with a carrying amount of $150,000. Disregarding income taxes, what amount should Ace report as a gain in its income statement?

    A.

    $0

    B.

    $25,000

    C.

    $50,000

    Incorrect

    $75,000

    This seems like an easy one right? 75k? No, the answer was 50k. Why? (I don’t agree)

    FAR 7/11/16 - 87
    BEC 9/9/16
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Viewing 9 replies - 1 through 9 (of 9 total)
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  • #783475
    Anonymous
    Inactive

    is the answer C?

    here's my thought process:

    Gain = amount received as result of note cancellation – fair value given up
    = 150-100 = 50

    #783476
    BenB
    Participant

    Does this journal entry seem right?

    Dr. Note Payable 150,000
    Cr. Land 75,000
    Cr. Gain on Land Disposal 25,000
    Cr. Gain on Debt Restructure 50,000

    The question says “what amount should Ace report as a gain in its income statement?” It seems like it should be 75,000 right?

    FAR 7/11/16 - 87
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    #783477
    KJ
    Participant

    Recognizing gain in debt restructure is the difference between fair value of the asset and carrying value of the debt, it will be $150-100 = $50K.

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    #783478
    So FAR So Good
    Participant

    Are you using Becker? I remember having a question like this and having a BIG problem with it. My justification for having an issue with this question is in the wording. If they were to have specifically used the question “What is the gain as a result of the troubled debt restructuring,” that answer would have been an easy $50k for me. However, since the question is vaguely worded as “what is the gain recognized on the income statement,” my thought went towards ALL entries booked to get to the answer. This includes both conversion AND restructuring to arrive at the $75k. When I asked Becker support to justify the answer based on the wording, they gave me a nonsensical response about how I should have assumed it was asking specifically about the debt restructuring aspect of the question.

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    .

    F - 91 (6/5/2016)
    A - 7/30/2016
    R - 10/8/2016
    B - 12/10/2016

    #783479
    BenB
    Participant

    The language is the same problem I'm having. It's a question from Ninja.

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    #783480
    Anonymous
    Inactive

    @BenB : your journal entry seems correct!

    i use fair value because the FV already take into consideration any gain/loss on asset disposal. but if we're doing journal entry, then yes, we will hv to break it down into carrying value and gain/loss on disposal.

    i know the wording is confusing. the way i approach the question is by not taking into account the gain/loss on disposal unless the question states specifically for total gain or ordinary gain

    #783481
    Skynet
    Participant

    Troubled Debt restructuring occurs when you are Divorced and have to pay Alimony to your ex.

    You only have a gain when your ex remarries, and you no longer have to pay alimony.

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    #783482
    lolo
    Member

    I take live courses and I remember that I asked the same question to my prof. he said its weird, he thought it would be 75 too…

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    #783483
    BenB
    Participant

    Got a similar question but it's a little more straight-forward.

    The following information pertains to the transfer of real estate pursuant to a troubled debt restructuring by Knob Co. to Mene Corp. in full liquidation of Knob's liability to Mene:

    Carrying amount of liability liquidated $150,000
    Carrying amount of real estate
    transferred 100,000
    Fair value of real estate transferred 90,000

    What amount should Knob report as a pretax gain (loss) on restructuring of payables?

    ANSWER:
    In the case of a transfer of assets to satisfy a debt in a troubled debt restructuring, the debtor shall recognize a gain/loss on the transfer of assets (equal to the difference between the fair value and carrying value of the liability liquidated).

    Carrying amount of liability settled $150,000
    Less fair value of real estate transferred 90,000
    ——–
    Pretax gain on restructuring of payables $ 60,000
    ========

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