Strickland Company owes $200,000 plus $18,000 of accrued interest to Moran State Bank. The debt is a 10-year, 10% note. During 2017, Strickland's business deteriorated due to a faltering regional economy. On December 31, 2017, 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. (a) Prepare journal entries for Strickland Company and Moran State Bank to record this debt settlement.
(b) How should Strickland report the gain or loss on the disposition of machine and on restructuring of debt in its 2017 income statement?
(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. If Moran State Bank treats Strickland's stock as a trading investment, prepare the entries to record the transaction for both parties.

A. Strickland Company (DEBTOR)

Dr Note Payable200,000

Dr Interest Payable18,000

Dr Accumulated Depreciation-Machine221,000

Cr Machine390,000

Cr Gain on Disposition of Machine 11,000

Cr Gain on Debt Restructuring 38,000

Moran State Bank (CREDITOR)

Dr Machine180,000

Dr Allowance for Doubtful Accounts38,000

Cr Note Receivable200,000

Cr Interest Receivable18,000

B. Based on the information given they should report both the gain or loss on the disposition of machine as well as on restructuring of debt as ordinary gain in its 2017 income statement

C. Strickland Company (DEBTOR)

Dr Note Payable200,000

Dr Interest Payable18,000

Cr Common Stock150,000

Cr Additional Paid-in Capital 30,000

Cr Gain on Debt Restructuring38,000

Moran State Bank (CREDITOR )

Dr Investment 180,000

Dr Allowance for Doubtful Accounts38,000

Cr Note Receivable200,000

Cr Interest Receivable18,000

Explanation:

(a)Preparation of the journal entries .

Strickland Company (DEBTOR)

Dr Note Payable200,000

Dr Interest Payable18,000

Dr Accumulated Depreciation-Machine221,000

Cr Machine390,000

Cr Gain on Disposition of Machine 11,000

[$180,000 – ($390,000 – $221,000) ]

Cr Gain on Debt Restructuring 38,000

[($200,000 + $18,000) – $180,000]

Moran State Bank (CREDITOR)

Dr Machine180,000

Dr Allowance for Doubtful Accounts38,000

Cr Note Receivable200,000

Cr Interest Receivable18,000

(b) Based on the information given they should report both the gain or loss on the disposition of machine as well as on restructuring of debt as ordinary gain in its 2017 income statement

(c)Preparation of the entries to record the transaction for both parties.

Strickland Company (DEBTOR)

Dr Note Payable200,000

Dr Interest Payable18,000

Cr Common Stock150,000

Cr Additional Paid-in Capital 30,000

Cr Gain on Debt Restructuring38,000

[($200,000 + $18,000) – $180,000]

Moran State Bank (CREDITOR )

Dr Investment 180,000

Dr Allowance for Doubtful Accounts38,000

[($200,000 + $18,000) – $180,000]

Cr Note Receivable200,000

Cr Interest Receivable18,000

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