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Strickland Company owes $200,000 plus $18,000 of accrued interest to Moran State Bank. The debt is a 10-year, 10% note. During 2012, Strickland’s business deteriorated due to a faltering regional economy. On December 31, 2012, Moran State Bank agrees to accept an old machine and cancel the entire debt. The machine has a cost of $390,000, accumulated depreciation of $221,000, and a fair value of $180,000.

(a) Prepare journal entries for Strickland Company and Moran State Bank to record this debt settlement.

(b) How should Strickland report the gain or loss on the disposition of machine and on restructuring of debt in its 2012 income statement?

(c) Assume that, instead of transferring the machine, Strickland decides to grant 15,000 shares of its common stock ($10 par) which has a fair value of $180,000 in full settlement of the loan obligation. If Moran State Bank treats Strickland’s stock as a trading investment, prepare the entries to record the transaction for both parties.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M958134

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