Question

Mann, Inc., which owes Doran Co. $1,000,000 in notes payable with accrued interest of $90,000, is in financial difficulty. To settle the debt, Doran agrees to accept from Mann equipment with a fair value of $950,000, an original cost of $1,400,000, and accumulated depreciation of $325,000.

Instructions

(a) Compute the gain or loss to Mann on the settlement of the debt.

(b) Compute the gain or loss to Mann on the transfer of the equipment.

(c) Prepare the journal entry on Mann’s books to record the settlement of this debt.

(d) Prepare the journal entry on Doran’s books to record the settlement of the receivable.

Answer 1

a
Gain on settlement:
Total debt	1,090,000
Less FMV of property	(950,000)
Gain on settlement	140,000
b
Book value of property	1,075,000
Less FMV	(950,000)
Loss on transfer	125,000
c
Account	Debit	Credit
Notes payable	1,000,000
Interest payable	90,000
Gain on extinguishment of debt		140,000
Loss on sale of property	125,000
Equipment		1,400,000
Accumulated depreciation	325,000
d
Account	Debit	Credit
Equipment	950,000
Bad debt expense	140,000
Notes receivable		1,000,000
Interest receivable		90,000