Question

. Ahmed Co. owes SAR 433,000 to Merando Inc. The debt is a 10-year, 11% note....

. Ahmed Co. owes SAR 433,000 to Merando Inc. The debt is a 10-year, 11% note. Because Ahmed Co. is in financial trouble, Merando Inc. agrees to accept some property and cancel the entire debt. The property has a book value of SAR 150,000 and a fair value of SAR 230,000. Prepare the journal entry on Ahmed 's books for debt settlement.

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Solution:

When a company exchanges an asset with a lender to eliminate a debt, the value of the transferred asset is first written up or down to match its book value to its fair market value, as shown in the first entry. Its fair market value is then netted against the remaining debt, as shown in the second entry.

In the Books of Ahmed for Debt Settlement
Property (230000-150000) 80000
Gain on Asset Transfer 80000
Notes Payable 433000
    Property 230000
    Gain on Debt Settlement 203000
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