Question

Marin Company owes $225,000 plus $20,200 of accrued interest to Headland State Bank. The debt is a 10-year, 10% note. During 2020, Marin’s business deteriorated due to a faltering regional economy. On December 31, 2020, Headland State Bank agrees to accept an old machine and cancel the entire debt. The machine has a cost of $317,000, accumulated depreciation of $174,350, and a fair value of $202,000.

a) Prepare journal entries for Marin Company and Headland State Bank to record this debt settlement. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

b) How should Marin report the following in its 2020 income statement?

1.Gain or loss on the disposition of a machine  
Ordinary Gain

Ordinary Loss

Ordinary Expense

Ordinary Income

Ordinary Loss
  

2.Gain or loss on restructuring of debt  
Ordinary Gain

Ordinary Loss

Ordinary Expense

Ordinary Income

Ordinary Loss  

part 2) Assume that, instead of transferring the machine, Marin decides to grant 12,000 shares of its common stock ($10 par) which has a fair value of $202,000 in full settlement of the loan obligation. If Headland State Bank treats Marin’s stock as a trading investment, prepare the entries to record the transaction for both parties. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Answer 1

a) In the books of Marin Company:

Debt A/c Dr. $ 225,000

Interest accrued on Debt A/c Dr. $ 20,200

Accumulated Depreciation A/c Dr $ 174,350

To Machine A/c. $ 3,17,000

To Gain on debt settlement. $ 102,550

In the books of Headland State Bank:

Machine A/c Dr $ 142,650

Loss on debt settlement A/c Dr $ 102,550

To Debt A/c. $ 225,000

To interest accrued on Debt A/c. $ 20,200

b) The gain should be reported as ordinary gain.

2) In the books of Marin Company:

Debt A/c Dr. $ 225,000

Interest accrued on Debt A/c Dr. $ 20,200

To Equity Share Capital A/c $ 120,000

To Capital Reserve A/c $ 125,200

In the books of Headland State Bank:

Investment in Marin Company A/c Dr $ 1,20,000

Goodwill A/c Dr $ 125,200

To Debt A/c. $ 225,000

To Interest accrued on Debt A/c. $ 20,200