Accounting for gain on loan forgiveness


N

NewAcc

I have a question;

Company A signed a 10 year lease term from B for office renting . B
loaned A $10,000 to enter the lease. The interest rate is 10% annually
and the principal will be paid at the end of 10 years.In year 2, B
offered A to forgive the loan and any interest over the remaining eight
years of the lease term if A remained a tenant. If A terminated the
lease at any time prior to the expiration date, note and any interest
would be owned pursuant to the original terms of the note. A decided to
accept the offer which was effective in year 3. My question is how to
account for the gain from debt forgiveness? The gain is $10,000?
 
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J

John

NewAcc said:
I have a question;

Company A signed a 10 year lease term from B for office renting . B
loaned A $10,000 to enter the lease. The interest rate is 10% annually
and the principal will be paid at the end of 10 years.In year 2, B
offered A to forgive the loan and any interest over the remaining eight
years of the lease term if A remained a tenant. If A terminated the
lease at any time prior to the expiration date, note and any interest
would be owned pursuant to the original terms of the note. A decided to
accept the offer which was effective in year 3. My question is how to
account for the gain from debt forgiveness? The gain is $10,000?
the note should be netted against the lease payments and amortized over the
remaining term
























































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N

NewAcc

Thanks for your reply, John. When the lease payment is reduced, the
$10,000 note payable should not be derecognized, right?
 
J

John

Thanks for your reply, John. When the lease payment is reduced, the
$10,000 note payable should not be derecognized, right?
it is a netting process reducing balances, no gain is recognized















































































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N

NewAcc

Hi,John

I am an accounting student. Currently my team have 3 solutions:

1) Treate the debt forgiveness as contingent gain, disclose it in the
footnoots. According to FAS 5.
2)Treate it as debt extinguishment and derecgnize the note liablity.
FAS140
3) Treate it as lease incentive as you said.FTB 88-1

In your opinion, how about solution 1 and 2 ?


Thanks
 
N

NewAcc

Hi, John

Thank you very much, especially it is holiday weekend. I hope you have
a good weekend, not like me.

For the lease incentive, we could account it in year 3:

Note payable 100,000
Lease incentive 100,000

Lease expense XXX
lease incentive (100,000/8) 12,500
Cash XXX( annual lease payment)

For the number 2, debt extinguishment, is this what you mean?
Lease expense XXX
Note payable 12,500
Cash XXX( annual lease payment)

Thanks
 
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J

John

NewAcc said:
Hi,John

I am an accounting student. Currently my team have 3 solutions:

1) Treate the debt forgiveness as contingent gain, disclose it in the
footnoots. According to FAS 5.
2)Treate it as debt extinguishment and derecgnize the note liablity.
FAS140
3) Treate it as lease incentive as you said.FTB 88-1

In your opinion, how about solution 1 and 2 ?
depending on the circumstances, solution (2) is possible if it's spread over
the lease terms


































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