7.Garfield Company pays its general manager an annual bonus.

For the year 2021, the company

reported a profit of 8,000,000 before deductions for bonus and corporate income taxes. The
corporate income tax is 30%.

1. Bonus is 8% of profit before deduction for both bonus and income taxes.
a. 592,593
b. 640,000
c. 459,016
d. 424,242

2. Bonus is 8% of profit after deduction for bonus but before deduction for income taxes.
a. 592,593
b. 640,000
c. 459,016
d. 424,242

3. Bonus is 8% of profit before deduction for bonus but after deduction for income taxes.
a. 592,593
b. 640,000
c. 459,016
d. 424,242

4. Bonus is 8% of profit after deduction for both bonus and income taxes.
a. 592,593
b. 640,000
c. 459,016
d. 424,242

8. Kaila CORPORATION is having financial difficulty and therefore has asked Angel Bank to
restructure its 3 million note outstanding. The presented note has 3 years remaining and pays a
current rate of interest of 10%. The present market rate for a loan of this nature is 12%. The
note was issued at its face value.

Presented below are four independent situations. Determine the journal entry that Kaila would
make for each of the following types of debt restructuring.

1. Angel Bank agrees to take an equity interest in Kaila by accepting common stock valued at
2,400,000 in exchange for relinquishing its claim on this note. The common stock has a par
value of 1,200,000.
a. Notes payable 3,000,000
Common stock 3,000,000
b. Notes payable 3,000,000
Common stock 1,200,000
APIC 1,800,000
c. Notes payable 3,000,000
Common stock 1,200,000
Interest expense 300,000
APIC 1,500,000
d. Notes Payable 3,000,000
Common stock 1,200,000
Share Premium 1,200,000
 Gain 600,000

2. Angel Bank agrees to accept land in exchange for relinquishing its claim on this note. The
land has a book value of 2,000,000 and a fair value of 2,500,000.
a. Notes payable 3,000,000
Land 2,500,000
Gain on debt restructuring 500,000
b. Notes payable 3,000,000
Land 2,000,000
Interest expense 300,000
Gain on exchange 200,000
Gain on debt restructuring 500,000
c. Notes payable 3,000,000
Land 2,000,000
Gain on exchange 1,000,000

d. No adjustment

3. Angel Bank agrees to modify the terms of the note, indicating that Dolores does not have to
pay any interest on the note over the 3-year period.
a. Interest payable 300,000
Gain on debt restructuring 300,000
b. Loss on debt restructuring 300,000
Interest expense 300,000
c. Interest expense 900,000
Gain on debt restructuring 900,000
d. Discount on Notes Payable 864,600
Gain 864,600

4. Angel Bank agrees to reduce the principal balance due to 2,000,000 and require interest
only in the second and third year at a rate of 10%.
a. Notes payable – old 3,000,000
Discount on Notes Payable 274,600
Notes payable – new 2,000,000
Gain on debt restructuring 1,274,600
b. Notes payable - old 3,000,000
Notes payable – new 3,000,000
c. Notes payable – old 3,000,000
Notes payable – new 2,600,000
Gain on debt restructuring 400,000
d. No adjustment