Question

Corona Industries purchased a stamping machine on January 2, 2018, for $100,000. It made an initial payment of $20,000 and financed the balance over 5 years at State Bank. The loan terms were for annual payments of $16,000 plus 10% interest, payable on December 31 each year. The year 2021 proves to be a difficult year and on December 1, 2021 Corona negotiates a debt restructuring with State Bank. The settlement calls for cash payment of accrued interest plus $4,000 on December 1 and the transfer of 200 acres of land held by Corona that cost $15,000. The land has a current fair value of $22,000.

What is the amount of the restructuring gain or loss to Corona?

Multiple Choice

• $6,000 loss

• $6,000 gain

• $8,933 loss

• $13,000 gain

Answer 1

Answer :- $6,000 gain

Calculation :-

Loan taken - payments made (in respect of principal) - fair value of asset given

They have made 3 annual installment of $16,000 plus interest on 31st december 2018, 2019 & 2020. So total payment made on account of principal is 16,000 * 3 = 48,000

At the time of restructuring, they paid 4000 in respect of principal and land of fair value 22,000.

So,

Gain / (Loss) = 100,000 - 20,000 - 48,000 - 4,000 - 22,000

= $ 6000 ( gain)