Exercise NO: 21

Strickland Company owes $200,000 plus $18,000 of accrued interest to Moran State Bank. The debt is a 10-year, 10% note. During 2014, Strickland’s busi

Strickland Company owes $200,000 plus $18,000 of accrued interest to Moran State Bank. The debt is a 10-year, 10% note. During 2014, Strickland’s business deteriorated due to a faltering regional economy. On December 31, 2014, 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.

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Instructions

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

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(b) How should Strickland report the gain or loss on the disposition of machine and on restructuring of debt in its 2014 income statement?

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(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.

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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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