During 2021 Belair Company was encountering financial difficulties and seemed likely to default on a $600,000, 10%, four-year note dated January 1, 2019, payable to Second Bank. Interest was last paid on December 31, 2020. On December 31, 2021, Second Bank accepted $500,000 in settlement of the note. Ignoring income taxes, what amount should Belair report as a gain from the debt restructuring in its 2021 income statement?

Question

Business

Kaylah Mora

1 December, 08:15

During 2021 Belair Company was encountering financial difficulties and seemed likely to default on a $600,000, 10%, four-year note dated January 1, 2019, payable to Second Bank. Interest was last paid on December 31, 2020. On December 31, 2021, Second Bank accepted $500,000 in settlement of the note. Ignoring income taxes, what amount should Belair report as a gain from the debt restructuring in its 2021 income statement?

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Answers (1)

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Kassidy House · Answer 1

Gain from the debt restructuring is $160,000

Explanation:

Debt restructing is a process which allows a company to reduce its financial gearing and improve the liquidity.

As per Given data

Note Payable = $600,000

Interest rate = 10%

Amount due on settlement date

Unpaid Interest = $600,000 x 10% = $60,000

Amount Due = Principal + Unpaid interest

Amount Due = $600,000 + $60,000 = $660,000

Gain is Settled for $500,000

Gain on debt restructuring = Amount Due - Settlemant amount

Gain on debt restructuring = $660,000 - $500,000 = $160,000