Question

On December 31, 2014, Merchant Bank enters into a debt restructuring agreement with Carson Company which is experiencing financial difficulties. The bank restructures a 12%, issued at par, $3,000,000 note receivable by:

1. Reducing the principal obligation from $3,000,000 to $2,400,000.

2. Extending the maturity date from December 31, 2014, to January 01, 2018

3. Reducing the interest rate from 12% to 10%.

Carson Company pays interest at the end of each year. On January 1, 2018, Carson Company pays $2,400,000 in cash to Merchant Bank.

Q1. On the 2014 income statement, the restructuring loss of debt reported by the Merchant Bank is:

a. above $800,000

b. below $700,000

c. between $750,000 and $700,000

d. between $800,000 and $750,000.01

Q2. In 2014 Carson Company reports its restructuring

a. gain below $500,000

b. gain between $500,000 and $550,000

c. gain higher than $550,000

d. loss

Answer 1