Use the following information for questions *103 through *105:
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 on the partial settlement and restructure of the debt of
A) $0.
B) $45,000.
C) $165,000.
D) $225,000.

Question

Quizplus · Accepted Answer

Nolte should recognize a gain of $225,000, calculated as follows: The total debt before restructuring is $1,980,000 ($1,800,000 note + $180,000 interest). The equipment given has a book value of $750,000 ($1,440,000 cost - $690,000 depreciation). The gain is the difference between the debt settled ($1,980,000) and the sum of the equipment's book value ($750,000) and the restructured note's face value ($750,000), which is $225,000.

Use the Following Information for Questions *103 Through *105

Use the Following Information for Questions 103 Through 105