Corona Industries purchased a stamping machine on January 2, 2011, for $100,000. It paid $20,000 down and financed the balance over 5 years at State Bank. Terms of the loan were 10% interest payable on December 31 each year with a required $16,000 principal payment. 2014 proves to be a difficult year and on December 1, Corona negotiates a debt restructuring with State Bank. The settlement calls for cash payment of accrued interest plus $4,000 on December 1 and the transfer of 200 acres of land held by Corona that cost $15,000. The land has a current market value of $22,000.
-What is the amount of the restructuring gain or loss to Corona?

Question

Quizplus · Accepted Answer

The restructuring gain is calculated by comparing the book value of the debt settled to the fair value of the consideration given. The book value of the debt includes the remaining principal and the accrued interest. The principal balance before the last payment was $16,000 (since it's a constant payment over 5 years and 2014 is the last year). The accrued interest for the year would be 10% of $16,000 = $1,600. Therefore, the total debt settled is $16,000 (principal) + $1,600 (interest) = $17,600. The consideration given includes $4,000 in cash and land with a fair market value of $22,000, totaling $26,000. The gain on restructuring is the difference between the fair market value of the consideration given ($26,000) and the book value of the debt settled ($17,600), which equals $8,400. However, since none of the provided options match this calculation, it seems there was a mistake in my calculation process based on the provided options. Re-evaluating the correct approach:The correct calculation should consider the actual cost or book value of the assets given up (cash + original cost of the land) and the book value of the debt settled. The cash paid is $4,000, and the original cost of the land is $15,000, totaling $19,000. The book value of the debt settled is $17,600 (as calculated above). The restructuring gain is the difference between the book value of the debt settled and the book value of the consideration given, which is $17,600 (debt) - $19,000 (consideration) = -$1,400. This indicates a loss, but again, this does not match any of the provided options, indicating a misunderstanding in the explanation process based on the options given.Given the options and the scenario, the correct approach to determine the restructuring gain or loss involves comparing the book value of the debt extinguished to the fair value of the assets given (including any cash payments). The correct answer should reflect the gain or loss based on these calculations, but without the exact breakdown of the remaining principal and interest before the restructuring, and considering the options provided, a precise calculation cannot be provided based on the initial explanation. The correct answer should be determined by the fair value of the assets given ($22,000 for the land plus $4,000 in cash) against the book value of the debt settled, including the accrued interest. However, without a direct calculation leading to one of the provided options, the initial explanation does not accurately resolve the question as intended.

Corona Industries Purchased a Stamping Machine on January 2, 2011