Question

Use the following information to answer questions 11-14 below.

Surf’s Up Corporation is having financial difficulty and therefore has asked Gotham National Bank to restructure its $5,000,000 note outstanding. The note has 3 years remaining and pays a current rate of interest of 10%. The present market rate for a loan of this nature is 11%. The note was issued at its face value.

The questions below reflect 4 independent ways that Gotham National Bank and Surf’s Up could restructure the debt. Consider them independently (i.e. Do not let your answer for one problem influence your answer for another).

11. Gotham National Bank agrees to take an equity interest in Surf’s Up by accepting common stock valued at $3,000,000 in exchange for relinquishing its claim on this note. The common stock has a par value of $1,000,000. Does Surf’s Up book a gain on the restructuring?

a. No.

b. Yes, a gain on restructuring for $1,000,000.

c. Yes, a gain on restructuring for $2,000,000.

d. Yes, a gain on restructuring for $3,000,000.

12. Gotham National Bank agrees to modify the terms of the note, indicating that Surf’s Up has to pay the principal, but does not have to pay any interest on the note over the 3-year period. Does Surf’s Up book a gain on the restructuring?

a. No.

b. Yes, a gain on restructuring for $1,000,000.

c. Yes, a gain on restructuring for $2,000,000.

d. Yes, a gain on restructuring for $3,000,000.

13. Gotham National Bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book value of $3,000,000 and a fair value of $2,000,000. Does Surf’s Up book a gain on the restructuring?

a. No.

b. Yes, a gain on restructuring for $1,000,000.

c. Yes, a gain on restructuring for $2,000,000.

d. Yes, a gain on restructuring for $3,000,000.

14. Gotham National Bank agrees to modify the terms: reducing the principal balance due to $2,608,696 and changing the stated rate from 10% to 5%. Does Surf’s Up book a gain on the restructuring?

a. No.

b. Yes, a gain on restructuring for $1,000,000.

c. Yes, a gain on restructuring for $2,000,000.

d. Yes, a gain on restructuring for $3,000,000.

please explain!

Answer 1

Question 11: Gotham National Bank agrees to take an equity interest in Surf’s Up by accepting common stock valued at $3,000,000 in exchange for relinquishing its claim on this note. The common stock has a par value of $1,000,000. Yes Surf’s Up book a gain on the restructuring. Yes, a gain on restructuring for $2,000,000. Option C

Question 12: Gotham National Bank agrees to modify the terms of the note, indicating that Surf’s Up has to pay the principal, but does not have to pay any interest on the note over the 3-year period. Yes, a gain on restructuring for $1,000,000. Option B

Question 13: Gotham National Bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book value of $3,000,000 and a fair value of $2,000,000. Yes, a gain on restructuring for $1,000,000. Option B

Question 14: Gotham National Bank agrees to modify the terms: reducing the principal balance due to $2,608,696 and changing the stated rate from 10% to 5%. No Surf’s Up will not book a gain on the restructuring. Option A.