Question

Company A is unable to make the December 31, 2019 interest payment. Company A is a calendar year company and accrued the 2019 interest On 1/1/2020 Company A agrees to transfer land and a building to Company B in full settlement of the note FMV 1/1/2020 $100,000 Land $250,000 Building Original Cost to Company A $75,000 land $300,000 Building Accum Dep 1/1/2020 $0 land $100,000 Building Book Value 1/1/2020 $75,000 land $200,000 Building What is the incremental impact on earnings for Company A from the settlement?

Answer 1

The incremental impact on earnings for Company A from the settlement will give a POSITIVE result.

Step-by-step explanation:

Without mincing words let's dive straight into the solution to the question above. So, we are given the following parameters which is going to be of help in solving this question.

=> The amount issued by company A = $500,000, the interest = 10%.

(1). For land:

FMV 1/1/20 = $100,000, Cost to Company A = $75,000 , Building Accum Dep 1/1/2020 = $0, and Book Value 1/1/2020 = $75,000.

(2). For Building:

FMV 1/1/20 = $250,000 Original Cost to Company A = $300,000, Building Accum Dep 1/1/2020 =$100,000 and Book Value 1/1/2020 =$200,000.

The FMV 1/1/20 for both the building and the land is given below as;

FMV 1/1/20 = $250,000 + $100,000 = $350,000.

At 1/1/20, the total amount that is being paid = 500,000 + 10/100 × 500,000 = $550,000.

Therefore, ($550,000 - $350,000) is the benefit. That is $200,000 is the benefit.