Accounting for gain on loan forgiveness

Jul 01, 2006 6 Replies
N

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

the note should be netted against the lease payments and amortized over the remaining term

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N

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

John wrote:

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J

it is a netting process reducing balances, no gain is recognized

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N

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

John wrote:

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N

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

John wrote:

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J

depending on the circumstances, solution (2) is possible if it's spread over the lease terms

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