Question

On December 31, 2020, Diaz Corp. is in financial difficulty and cannot pay a $900,000 note with $90,000 accrued interest payable to Cameron Ltd., which is now due. Cameron agrees to accept from Diaz equipment that has a fair value of $435,000, an original cost of $ 720,000, and accumulated depreciation of $345,000. Cameron also forgives the accrued interest, extends the maturity date to December 31, 2022, reduces the face amount of the note to $375,000, and reduces the market interest rate of 6%, with interest payable at the end of each year.

Diaz should recognize a gain or loss on the transfer of the equipment of:

$285,000 loss.

$0.

$60,000 gain.

$90,000 gain.

Answer 1

Answer:- $60,000

Reason:- Only gain or loss attributable to the sale of equipment should be recgnised as a gain or loss on the transfer of the asset. Gain on restructuring of notes payable cannot be recognised as gain on asset transfer.

Original cost of equipment = $720,000

Accumulated depreciation = $345,000

Carrying value = $375,000

Fair value on transfer = $435,000

So, gain on the transfer of the equipment to be recognized = $435,000 - $375,000 = $60,000