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CPAhamster
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Joined: 24 Oct 2009
Location: United States
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Posts: 52

Posted: 27 Nov 2009 at 02:53 \| IP Logged

X owes $200 000 plus $18 000 of accrued interest to the bank. The debt is a 10 year, 10% note. During 2007, X is undergoing financial difficulties. On Dec 31, 2007, the bank agrees to accept an old machine and cancel the entire debt. The machine has a cost of $390 000, accumulated depreciation of $221 000, and a FV of $190 000.

So, I came up with the following entry for X

Note payable 200 000
Int. payable 18 000
Depr        221 000
             Machine        ;   390 000
             Gain on Rest     28 000
             Gain on disp     21 000

I followed the rules calculating gain/loss on disposition - FV > BV = gain (FV 190 > BV 169)
But ...why is it a gain, not loss? I can't come up with the explanation why if FV > BV it's a gain....

When I calculate gain on restructuring, it's easy for me to understand when we owe 218 000 but transfer smth with a FV 0f 190 000, it's definitely a gain for us.

But gain on disposition is a puzzle...
Please help
Thank you in advance

joecjr
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Joined: 10 Oct 2009
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Posted: 27 Nov 2009 at 10:26 \| IP Logged

the gain on disposition results when the terms of the contract are modified. The modification is always in favor of the debtor, and now they owe less on the note payable then was originally booked, and so the plug is to a gain on disposal of debt.

The exchange of the asset can be a gain or a loss depending on the fmv of asset exchanged and is measured the same as in nonmonetary exchanges where the c/v is compared to fmv

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lovethepirk
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Posted: 27 Nov 2009 at 16:29 \| IP Logged

You could look at it as if you are selling the asset and then taking the money an applying it towards the payment of the loan or restructuring of the loan.

In this theoretical case, you have book value of 169 and you would receive 190, so there would be a gain. Then you would encounter another gain as you restructure.

hope joe and I helped you ;)

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CPAhamster
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Posted: 27 Nov 2009 at 22:56 \| IP Logged

Thank you, it's very clear

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