10. On December 31, 2015, Nolte Co. is in financial difficulty and cannot pay a

Question

10. On December 31, 2015, Nolte Co. is in financial difficulty and cannot pay a note due that day. It is a $3,000,00o note with $300,000 accrued interest payable to Piper, Inc. Piper agrees to accept from Nolte equipment that has a fair value of $1,450,000, an original cost of $2,400,00o, and accumulated depreciation of $1,150,o00. Piper also forgives the accrued interest, extends the maturity date to December 31, 2018, reduces the face amount of the note to $1,250,000, and reduces the interest rate to 6%, with interest payable at the end of each year. Nolte should recognize a gain on the partial settlement and restructure of the debt of

Explanation / Answer

Given:

1) Face Value of Note payable on Dec 31, 2015 = $ 3,000,000

2) Accrued Interest on (1) due = $ 300,000

Modified Terms in exchange for Original Note Payable and Interest accrued thereon:

1) Equipment Fair Value offered in exchange = $ 1,450,000

2) Accrued Interest = Forgiven. hence, 0

3) New Maturity Date = December 31, 2018. So, extension = 3 years

4) Reduced Face Value of Note = $ 1,250,000

5) Reduced interest rate = 6%

Therefore,

Gain on the partial settlement and restructure of debt = ( Face Value of original Noote Payable + Interest Accrued thereon as of Dec 31, 20104) - ( Fair Value of Equipment offered as part of settlement + Face Value of new Note Payable + (Face Value of New Note Payable * Interest rate * Period of extension).

=> ($3,000,000+$300,000) - ($1,450,000 + $1,250,000 + ($1,250,000*6%*3)

=> $3,300,000 - ($2,700,000+$225,000)

=> $3,300,000 - 2,925,000

Answer = The gain on the partial settlement and restructure of the debt of Nolte Company = $ 375,000

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