Mann, Inc., which owes Doran Co. $800,000 in notes payable with accrued interest
ID: 2420810 • Letter: M
Question
Mann, Inc., which owes Doran Co. $800,000 in notes payable with accrued interest of $72,000, is in financial difficulty. To settle the debt, Doran agrees to accept from Mann equipment with a fair value of $760,000, an original cost of $1,120,000, and accumulated depreciation of $260,000.
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 books to record the settlement of this debt.
(d) Prepare the journal entry on Doran's books to record the settlement of the receivable.
Explanation / Answer
a. note payable $800000
accrued interest $72000
Total liability $872000
Fair Value of equipment = $760000
Gain on settlemnet is (872000-760000) = $112000
b.
Book value of equipent is (1120000-260000) = $860000
transfer of equipment agiainst $8720000 debt
Gain on transfer is $120000
c.
Note payable a/c dr. 800000
Accrued int. a/c Dr. 72000
equipment accoun a/c 860000
profit on settlement a/c 12000
Being debt settled by equipment transfer.
d.
equipment account a/c Dr. 760000
profit and loss a/c Dr. 112000
to Note receivable a/c 800000
to interess receivable a/c 720000
Being Doran settled the loan in the books and also recorded the loss on settlement.
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