Question

Q3. ABC Inc., which owes Hook Co. SAR 900,000 in notes payable, is in financial difficulty. To eliminate the debt, Hook agrees to accept from ABC land having a fair value of SAR 610,000 and a recorded cost of SAR 450,000.

Instructions

(a)   Compute the amount of gain or loss to ABC, Inc. on the transfer (disposition) of the land.

(b)   Compute the amount of gain or loss to ABC, Inc. on the settlement of the debt.   

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

Answer 1

solution :
given that
ABC Inc which owes hook Co $900000 in notes payable is in financial difficulty .
also given that
to eliminate the debt ,hook agrees to accept fromABC land having
fair value = $610000
recorded cost = $450000

(a) Computing the amount of gain or loss to ABC, Inc. on the transfer (disposition) of the land:

Fair market value -$610000 and Book value or cost - $ 450000

Thus ABC Inc had a gain of 610000 - 450000 =$160000 on transfer of land.

(b) Computing the amount of gain or loss to ABC, Inc. on the settlement of the debt :
On the Settlement of Debt ,
ABC inc had a gain of $900000 - $610000 = $290000

(c) Preparing the journal entry on ABC’s books to record the settlement of this debt:
Land A/c Dr $6100000

Loss on transfer of land dr $290000

To Notes Payable A/c $900000