[GeauxAwayCPA]

Why is the answer to the below question C ($50,000)? The solution just says “In computing gain or loss, assets conveyed in a troubled debt restructuring should be valued at their fair value” and I 100% get that. But what about the difference between the carrying value(75,000) and the fair value(100,000) of $25,000? Shouldn’t there be a “loss on disposal” element to this too that would make the gain in the income statement $75,000??

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
D. $75,000

Licensed CPA in Texas trying to start up my own tax practice

[vodrldnr]

Note carrying amount : 150,000
The fair value of asset used to settle the obligation : 100,000

150,000 -100,000 =50,000

End of explanation.

It ain't About How Hard You Hit

[GeauxAwayCPA]

That's exactly what the solution said lol. I figured out that much.

I guess the question I'm looking to get answered is why don't we recognize the difference between the $75,000 carrying value and the $100,000 fair value.

The question asks “what amount should Ace report as a gain in its income statement?” It doesn't specify the “gain on the settlement of the transaction”; it asks for a general gain amount that would be recorded in the income statement. Ace has an asset on the books for $75,000 which it used to “pay for” or settle an obligation of $150,000. That's a spread of $75,000, not $50,000. I find it hard to believe that it's ok to just overlook the other $25,000. Logically, that just does not make sense to me so I have to be missing something here. What am I missing?

Licensed CPA in Texas trying to start up my own tax practice

[vodrldnr]

keeping all numbers the same as question above, Let say I have to pay you back 150,000.

But you allow me to give you a land to settle the obligation of giving you $150,000

the land has value of $100,000 if you sell it on market. (assume there is a market where only land is traded at its FMV)

If I just go to market and sell the land for cash of $100,000 to settle my obligation to pay you $150,000

I need to spend 50,000 more even after selling the land on its market.

However, since you are so generous, you just allow me give you land directly and settle the obligation of $150,000. after all, I save $50,000 thanks to your kindness which means gain to me

It ain't About How Hard You Hit

[GeauxAwayCPA]

Thanks for your responses @vodrldnr but I still feel like there is another side to this transaction that I need clarification on.

I get the part of this transaction between me and the person with whom I have the obligation. I get that I came out ahead by $50,000 b/c I owed 150,000 and “paid” 100,000 worth of land. No issues there.

That still does not address the fact that I paid $75,000 for this land and it's now worth $100,000. I also came out ahead with the land because I used land that cost $75,000 as consideration for $100,000, right? Is that not a gain of $25,000 in addition to the gain of $50,000? lol, maybe I'm just an idiot.

Is there anyone else out there that has some input?

Licensed CPA in Texas trying to start up my own tax practice

[vodrldnr]

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 exchange for a note with a carrying amount of $150,000. Disregarding income taxes, what amount should Ace report as a gain on restructuring the debt?

I looked up this question to check if I am doing it right.

and I found that you did not post the full question( or maybe your book is wrong)

when I first check your post, I just assumed it is asking for restructuring gain.

Like you say, there is gain on disposal of land

but also + there is gain from restructuring

The J/E for this question is like this

Note payable 150000/Land 75000
//////////////////Disposal gain 25000
//////////////////Gain from restructuring 50,000

If the question is asking total gain for the year with no other transaction involved, the answer will be 75,000

If the question is asking the gain from disposal of land, the answer will be 25,000

If the question is asking the gain from restructuring, the answer will be 50,000 which is the answer for this problem

It ain't About How Hard You Hit

[GeauxAwayCPA]

@vodrldnr thank you for confirming I'm not crazy haha. I had a feeling it had something to do with the way the question was worded. I copied and pasted that question straight from the Ninja software and it asks for simply the “gain”; since it didn't specify if it wanted gain from restructuring or disposal, the only gain possible other than those two would be the total gain, which is why I chose $75,000. But then it gave me the “INCORRECT!” slap in the face and I just felt lost. LOL. Although it doesn't really make me feel better, it seems like it's an issue with the wording with the question. It's very ambiguous, which is frustrating!

what book/software are you using? does it show you the question and all of the different types of questions we could be asked with their corresponding solutions?

Licensed CPA in Texas trying to start up my own tax practice

[vodrldnr]

@GeauxAwayCPA I only use Wiley for study material. I was thinking about getting Ninja MCQ couple of weeks later but the wording (or maybe error) of the problem you posted from Ninja makes me little hesitate to buy it…

It ain't About How Hard You Hit

[GiniC]

I am having difficulty with the same question – perhaps it has something to do with what gain will be reported ON THE INCOME STATEMENT. Does the “holding gain” or gain on disposal go somewhere else, perhaps?

Gini

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[Author]

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