_____ Ruptsy, Inc., is in Chapter 11 bankruptcy reorganization proceedings. Information concerning Ruptsy's 8% outstanding bonds as of 5/2/05, as obtained from the plan of reorganization, follows:
(a) Face value-$2,000,000.
(b) Accrued interest-$200,000.
(c) Unamortized bond premium-$30,000.
(d) Total future payments (principal and interest)-$2,120,000.
(e) Present value of future principal and interest payments using an appropriate current interest rate-$1,800,000.
How much should Banco report as a gain on discharge of indebtedness?

Question

Quizplus · Accepted Answer

The gain on discharge of indebtedness is calculated by subtracting the present value of future principal and interest payments from the total amount of the debt before reorganization. The total debt before reorganization includes the face value of the bonds ($2,000,000), accrued interest ($200,000), and unamortized bond premium ($30,000), totaling $2,230,000. Subtracting the present value of future payments ($1,800,000) from this amount gives a gain of $430,000.