Consider the following independent situations.

Instructions

(a) Gottlieb Co. owes €199,800 to Ceballos Inc. The debt is a 10-year, 11% note. Because Gottlieb Co. is in financial trouble, Ceballos Inc. agrees to accept some land and cancel the entire debt. The land has a book value of €90,000 and a fair value of €140,000. Prepare the journal entry on Gottlieb’s books for debt settlement.

(b) Vargo Corp. owes $270,000 to First Trust. The debt is a 10-year, 12% note due December 31, 2015.

Because Vargo Corp. is in financial trouble, First Trust agrees to extend the maturity date to December 31, 2017, reduce the principal to $220,000, and reduce the interest rate to 5%, payable annually on December 31. Vargo’s market rate of interest is 8%. Prepare the journal entries on Vargo’s books on December 31, 2015, 2016, and 2017.