Wood Corp., a debtor-in-possession under Chapter 11 of the Federal Bankruptcy Code, granted an equity interest to a creditor in full settlement of a $28,000 debt owed to the creditor. At the date of this transaction, the equity interest had a fair value of $25,000. What amount should Wood recognize as a gain on restructuring of debt? a) $0b) $3,000c) $25,000d) $28,000

Question

Business

Claudia Barron

30 September, 12:02

Wood Corp., a debtor-in-possession under Chapter 11 of the Federal Bankruptcy Code, granted an equity interest to a creditor in full settlement of a $28,000 debt owed to the creditor. At the date of this transaction, the equity interest had a fair value of $25,000. What amount should Wood recognize as a gain on restructuring of debt? a) $0b) $3,000c) $25,000d) $28,000

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Answers (2)

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Regan Chen · Answer 1

Answer: A - 0

Explanation:from the above question, the value of the debt is $28,000 and the value of the payment instrument is $25,000.

Here, we can say that wood will recognise a $0 gain because the equity interest had a fair value of $25,000 and the value of the debit is $28,000

Jane Baird · Answer 2

B) $3,000

Explanation:

Chapter 11 bankruptcy involves the reorganization of debts and assets. A debtor in possession refers to a company that filed for bankruptcy under chapter 11 but still possesses assets that can be used to pay off debts.

The gain on restructuring the debt will equal the difference in the debt's book value and the asset's fair market value = $28,000 - $25,000 = $3,000