Question

On December 31, 2018, Diaz Corp. is in financial difficulty and cannot pay a $900,000 note with $90,000 accrued interest payable to Cameron Ltd., which is now due. Cameron agrees to accept from Diaz equipment that has a fair value of $435,000, an original cost of $720,000, and accumulated depreciation of $345,000. Cameron also forgives the accrued interest, extends the maturity date to December 31, 2021, reduces the face amount of the note to $375,000, and reduces the interest rate to 6%, with interest payable at the end of each year.

18. Diaz should recognize a gain or loss on the transfer of the equipment of a) $0.
b) $60,000 gain.
c) $90,000 gain.

d) $285,000 loss.

19. Diaz should recognize a gain on the partial settlement and restructure of the debt of a) $0.
b) $22,500.
c) $112,500.

d) $180,000.

20. Diaz should record interest expense for 2021 of a) $0.
b) $22,500.
c) $45,000.

d) $67,500.

On its December 31, 2018 statement of financial position, Codfish Ltd. reported bonds payable of $1,000,000. The bonds had been issued at par. On January 2, 2019, Codfish retired one half of the outstanding bonds at 103 plus a call premium of $35,000. Ignoring income taxes, what amount should Codfish report on its 2019 income statement as loss on extinguishment of debt?
a) $50,000
b) $35,000
c) $15,000
d) $0

On July 1, 2018, Tilapia Corp. had outstanding 8%, $1,000,000, 10-year bonds maturing on June 30, 2028. Interest is payable semi-annually on June 30 and December 31. Assume all appropriate entries had been prepared and posted at June 30, 2019. The carrying value of the bond at June 30, 2019 was $965,000. At this time, Tilapia purchased all the bonds at 94 and retired them. What is the gain or loss on this early extinguishment of debt?

a) $60,000 gain b) $35,000 loss c) $25,000 gain d) $25,000 loss

Granger Ltd. reported the following information on their most recent statement of financial position:

Current assets Total assets Current liabilities Total equity

$200,000 797,000 160,000 350,000

$80,000 20,000 160,000

To the nearest percent, what is Granger’s debt to total assets? a) 20%
b) 44%
c) 56%

d) 80%

Answer 1

Situation 1:

Interest accrued of $90,000 is waived off.

Equipment having written down value of $375,000 ($720,000 - $345,000) is given at a fair value of $435,000 after which the Notes Payable is coming at $375,000.

Total Profit on Restructuring = $900,000 + $90,000 - $435,000 - $375,000 = $180,000

Profit on exchange of asset = $435,000 - $375,000 = $60,000

Interest payable at the end of 2019 = $375,000 x 6% = $22,500

a) Diaz should recognize a gain on transfer of the equipment at $60,000. Therefore, Option b is correct.

b) Diaz should recognize a gain on partial settlement and restructure of the Loan at $180,000. Therefore, Option d is correct.

c) Diaz should recognize interest expense for 2021 at $22,500. Therefore, Option b is correct.

Situation 2:

Coldfish Ltd. retired 50% of Bonds Payable at 103 plus a call premium of $35,000

Amount paid on retirement of Bonds =( $1,000,000 x 50% x 103/100 ) + $35,000

= $15,000 + $35,000

= $50,000

Option a is correct.