Question

In: Accounting

Jeffrey owns 100% of HR Company. In 2016, he lent the firm $70,000. In 2018, he...

Jeffrey owns 100% of HR Company. In 2016, he lent the firm $70,000. In 2018, he cancelled the debt. The results of this debt cancellation are:

A. HR Company recognizes $70,000 gain; no effect to Jeffrey

B. HR Company recognizes $70,000 gain; Jeffry has $70,000 bad debt

C. HR Company has no income; no effect to Jeffrey

D. HR Company has no income; Jeffrey has $70,000 bad debt

E. HR Company has no income; Jeffrey increases his basis in HR Company Stock

Expert Solution

Answer : The Statement B is correct, HR company recognizes $70,000 gain; Jeffry has $70,000 bad debt.

Working : When Jeffry lent the firm $70,000 in year 2016, The HR company shall pass the journal entry as:

Bank A/c Debit $70,000

Jeffrey Loan A/c Credit $70,000

At the time of cancellation of loan, HR company shall pass the journal entry as :

Jeffrey Loan A/c Debit $70,000

Income on Cancellation of Jeffrey loan A/c Credit $70,000

In the Same way, Jeffry shall record journal entry in his personal book as :

When the loan is given in 2016.

HR Firm A/c Debit $70,000

Bank A/c Credit $70,000

When the loan is cancelled in 2018.

Bad Debt A/c Debit $70,000

HR Firm A/c Credit $70,000

Therefore , HR company shall recognize income with $70,000 and Jeffrey shall record bad debts amounting $70,000.

Statement B is correct.

ekkarill92 answered 3 months ago

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