_____ Banco, Inc., is in Chapter 11 bankruptcy reorganization proceedings. Information concerning Banco's 10% outstanding bonds as of 6/1/06, as obtained from the plan of reorganization, follows:
(a) Face value-$1,000,000.
(b) Accrued interest-$150,000.
(c) Unamortized bond discount-$10,000.
(d) Total future payments (principal and interest)-$1,080,000.
(e) Present value of future principal and interest payments using an appropriate current interest rate-$700,000.
How much should Banco report as a gain on discharge of indebtedness?

Question

Quizplus · Accepted Answer

The gain on discharge of indebtedness is calculated as the difference between the carrying amount of the debt and the amount paid to settle the debt. The carrying amount is the face value plus accrued interest minus unamortized discount ($1,000,000 + $150,000 - $10,000 = $1,140,000). The amount paid to settle the debt is the present value of future payments, which is $700,000. Therefore, the gain on discharge is $1,140,000 - $700,000 = $440,000.