Question

During 2018 Marquis Company was encountering financial difficulties and seemed likely to default on a $300,000, 10%, four-year note dated January 1, 2016, payable to Third Bank. Interest was last paid on December 31, 2017. On December 31, 2018, 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 2018 income statement?

a) $20,000.b) $50,000.c) $80,000.d) $0.

Answer 1

The answer is: C) $80,000

Step-by-step explanation:

Marquis Company should recognize gains from both a reduction in the debt's principal and its interest.

The debt principal was $300,000 and the interests were $30,000 (10% of the principal), their total amount was $330,000. If the bank accepted $250,000 as total settlement for the debt, then the difference between the total debt and the settling payment is considered gain: $330,000 - $250,000 = $80,000