Mann, Inc., which owes Doran Co. $1,200,000 in notes payable with accrued interest of $108,000, is in financial difficulty. To settle the debt, Doran agrees to accept from Mann equipment with a fair value of $1,140,000, an original cost of $1,680,000, and accumulated depreciation of $390,000. Instructions
(a) Compute the gain or loss to Mann on the settlement of the debt.
(b) Compute the gain or loss to Mann on the transfer of the equipment.
(c) Prepare the journal entry on Mann’s book to record the settlement of this debt.
(d) Prepare the journal entry on Doran’s books to record the settlement of the receivable.

A. $168,000

B.$150,000

C.Dr Notes Payable1,200,000

Dr Interest Payable 108,000

Dr Accumulated Depreciation 390,000

Dr Loss on Disposal of Equipment 150,000

Cr Equipment 1,680,000

D.Dr Equipment 1,140,000

Dr Allowance for Doubtful Accounts 168,000

Cr Notes Receivable1,200,000

Cr Interest Receivable 108 ,000

Explanation:

Mann, Inc.,

(a)Computation of the gain or loss to Mann on the settlement of the debt will be:

Note payable$1,200,000

Add Interest payable108,000

Carrying amount of debt 1,308,000

Less Fair value of equipment (1,140,000)

Gain on restructuring of debt$ 168,000

(b)Computation of the gain or loss to Mann on the transfer of the equipment will be:

Cost$1,680,000

Less Accumulated depreciation (390,000)

Book value1,290,000

Less Fair value of plant assets (1,140,000)

Loss on disposal of equipment$ 150,000

(c) The Journal urnal entry on Mann’s book to record the settlement of this debt will be:

Dr Notes Payable1,200,000

Dr Interest Payable 108,000

Dr Accumulated Depreciation 390,000

Dr Loss on Disposal of Equipment 150,000

Cr Equipment 1,680,000

Cr Gain on Restructuring of Debt 168,000

(d) The journal entry on Doran’s books to record the settlement of the receivable will be:

Dr Equipment 1,140,000

Dr Allowance for Doubtful Accounts 168,000

Cr Notes Receivable1,200,000

Cr Interest Receivable 108 ,000

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