During 2009 Marquis Company was encountering financial difficulties and seemed likely to default on a $300,000, 10%, four-year note dated January 1, 2007, payable to Third Bank. Interest was last paid on December 31, 2008. On December 31, 2009, Third Bank accepted $250,000 in settlement of the note. Ignoring income taxes, what amount should Marquis report as a gain from the debt restructuring in its 2009 income statement?
A)$20,000
B)$50,000
C)$80,000
D)$0 $300,000 + 10% ($300,000) 250,000 = $80,000

Question

Quizplus · Accepted Answer

The gain from the debt restructuring is calculated as the difference between the carrying value of the debt and the amount paid to settle it. The carrying value of the note is the face value plus any accrued interest that has not been paid as of the restructuring date. 
Carrying value on December 31, 2009 = $300,000 + [(10% x $300,000)/365 x 365] - (10% x $300,000) = $330,000 
Gain on debt restructuring = $250,000 - $330,000 = ($80,000) 
Since the gain is negative, there is no gain to be reported on the income statement. Therefore, the correct answer is (C).

During 2009 Marquis Company Was Encountering Financial Difficulties and Seemed