On December 31, 2010, Martha Ltd.owes Stewart Corp.$50, 000 on a 10% note payable.Two years of interest is also unpaid and due.Martha cannot pay off the debt.Stewart agrees to reduce the principal amount to $30, 000, extend the due date to December 31, 2013, and reduce the interest rate to 5% per year for the extended period.What amount of gain on restructuring should Martha record?

Question

Quizplus · Accepted Answer

The correct answer is A.The gain on restructuring is the difference between the carrying amount of the old debt and the fair value of the new debt. The carrying amount of the old debt is $50,000 + $10,000 (two years of unpaid interest) = $60,000. The fair value of the new debt is $30,000 + $1,500 (three years of interest at 5%) = $31,500. Therefore, the gain on restructuring is $60,000 - $31,500 = $28,500.