Strickland Inc. owes Heartland Bank $200,000 plus $18,000 of accrued interest. The debt is a 10-year, 10% note. During 2011, Strickland’s business deteriorated due to a faltering regional economy. On December 31, 2011, the 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. The bank plans to dispose of the machine at a cost of $6,500.
Instructions
(a) Prepare the journal entries for Strickland Inc. and Heartland Bank to record this debt settlement.
(b) How should Strickland report the gain or loss on the disposition of the machine and on the restructuring of debt in its 2011 income statement?
(c) Assume that instead of transferring the machine, Strickland decides to grant the bank 15,000 of its common shares, which have a fair value of $190,000. This is in full settlement of the loan obligation. Assuming that Heartland Bank treats Strickland’s shares as trading securities, prepare the entries to record the transaction for both parties.