During 2018 Marquis Company was encountering financial difficulties and seemed likely to default on a $300,000, 10%, four-year note dated January 1, 2016, payable to Third Bank. Interest was last paid on December 31, 2017. On December 31, 2018, Third Bank accepted $250,000 in settlement of the note. Ignoring income taxes, what amount should Marquis report as a gain from the debt restructuring in its 2018 income statement?

a) $20,000. b) $50,000. c) $80,000. d) $0.

Question

Kody Benitez

Business

4 December, 13:06

During 2018 Marquis Company was encountering financial difficulties and seemed likely to default on a $300,000, 10%, four-year note dated January 1, 2016, payable to Third Bank. Interest was last paid on December 31, 2017. On December 31, 2018, Third Bank accepted $250,000 in settlement of the note. Ignoring income taxes, what amount should Marquis report as a gain from the debt restructuring in its 2018 income statement?

a) $20,000. b) $50,000. c) $80,000. d) $0.

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Answers (1)

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Lutz · Answer 1

The answer is: C) $80,000

Explanation:

Marquis Company should recognize gains from both a reduction in the debt's principal and its interest.

The debt principal was $300,000 and the interests were $30,000 (10% of the principal), their total amount was $330,000. If the bank accepted $250,000 as total settlement for the debt, then the difference between the total debt and the settling payment is considered gain: $330,000 - $250,000 = $80,000