Gold Company Was Experiencing Financial Difficulties, but Was Not Bankrupt

question 44

Multiple Choice

Gold Company was experiencing financial difficulties, but was not bankrupt or insolvent. The National Bank, which held a mortgage on other real estate owned by Gold, reduced the principal from $110,000 to $85,000. The bank had made the loan to Gold when it purchased the real estate from Silver, Inc. Pink, Inc., the holder of a mortgage on Gold's building, agreed to accept $40,000 in full payment of the $55,000 due. Pink had sold the building to Gold for $150,000 that was to be paid in installments over 8 years. As a result of the above, Gold must:

• A) Include $40,000 in gross income.
• B) Reduce the basis in its assets by $40,000.
• C) Include $25,000 in gross income and reduce its basis in its assets by $15,000.
• D) Include $15,000 in gross income and reduce its basis in the building by $25,000.
• E) None of these.

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Definitions:

Balance Sheet

A financial statement that summarizes a company's assets, liabilities, and shareholders' equity at a specific point in time.

Finished Goods Inventory

Items in a manufacturer's inventory that are completed and ready for sale.

Direct Materials

These are raw materials that are directly used in the production of a product and are easily traceable to the product itself.

Materials Inventory

The total cost of all the materials that are currently stored by a company and that will be used in production.