Question

On December 31, 2012, Nolte Co. is in financial difficulty and cannot pay a note due that day. It is a $1,800,000 note with $180,000 accrued interest payable to Piper, Inc. Piper agrees to accept from Nolte equipment that has a fair value of $870,000, an original cost of $1,440,000, and accumulated depreciation of $690,000. Piper also forgives the accrued interest, extends the maturity date to December 31, 2015, reduces the face amount of the note to $750,000, and reduces the interest rate to 6%, with interest payable at the end of each year.

Nolte should recognize a gain or loss on the transfer of the equipment of

a.   $0.

b.   $120,000 gain.

c.   $180,000 gain.

d.   $570,000 loss.

Nolte should recognize a gain on the partial settlement and restructure of the debt of

a.   $0.

b.   $45,000.

c.   $165,000.

d.   $225,000.

Answer 1

Solution :- B. $120,000 gain

Nolte should recognise a gain of $120,000 on the transfer of the equipment

Calculation:- Fair value givein the question is $870,000

Less:- Face Amount of the note $750,000

Gain on sale $120,000

Solution :- D. $225, 000

Nolte should recognise a gain of $225,000 on the partial settlement and restructure of debt

Calculation :- ($750,000 × 6% = $45000)

Accrued Interest Payable = $180,000

Gain on the partial settlement and restructure of the debt =$180,000 + $45000 = $225,000