Exter Company is experiencing financial difficulties. It has assets worth $2 million, but owes liabilities of $2.1 million. It has a longstanding relationship with the bank. The bank has agreed to forgive $300,000 of debt principal. Because of this debt forgiveness, Exter will recognize income of
A) $0.
B) $100,000.
C) $200,000.
D) $300,000.
C) $200,000.
While debt forgiveness is normally recognized, Exter is insolvent to the extent of $100,000 ($2 million assets - $2.1 million liabilities). The remaining $200,000 of debt forgiven must be recognized.
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