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4) On January 1, Year 1, Gearty Corporation loans Olinto Fabrix, Inc. $200,000 with a 10% simple interest note payable in ten years. Interest on the note is payable annually and the principal is due at the end of the term. On January 1, Year 3, Olinto has yet to pay any interest and approaches Gearty in the hope of renegotiating the terms. Gearty agrees, forgives the interest on the note accrued to date, and reduces the interest to 8 percent.The following present value amounts are available.Present Value of $1Present Value of an Annuity8%10%8%10%Eight years.540.4675.7675.335Ten years.463.3866.7106.145As a result of this troubled debt restructuring, Gearty should record:A) An extraordinary loss of $39,900.B) An extraordinary loss of $56,100.C) Bad debt expense of $64,480.D) A valuation allowance of $61,240.5) Bush Corporation signed a lease for equipment from EZ Leasing Company on January 1, Year 1, for a period of ten years at $50,000 per year, including insurance of $3,000 and taxes of $2,000 per year. The equipment had a useful life of fifteen years. At the end of the lease, Bush will have the option of buying the equipment outright for a dollar. Bush’s incremental borrowing rate is 8%, and the rate implicit in the lease (which is known to Bush) is 6%. Lease payments are due every year on December 31. The present value of an annuity for various terms and rates are as follows:6% 8%10 years 7.360 6.71015 years 9.712 8.559On its financial statements for the year ended June 30, Year 1, Bush will display the following:Accumulated Equipment ;Lease Depreciation; Accrued Payable;InterestA) $331,200; $11,040; $331,200; $ 9,936B) $368,000; $18,400; $306,960; $ 11,040C) $301.950; $10,065; $301,950; $ 12,078D) $437,040; $14,568; $331,200 ;$ 9,936
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