Supposed B borrows $100,000 from L and uses it to drill an oil well. B hits a dry hole and loses the entire $100,000 investment. Although B is solvent, L discharges the $40,000 of the debt.

Journal entries to record these events might look like this:

Cash                                                 $100,000

Debt payable                                  $100,000

Loss on oil well                               $100,000

Cash                                                 $100,000

Debt payable                                  $40,000

                                                          $40,000

 

1. Under the “Whole Transaction” theory, what account would be credited above for $40,000?
2. Under the “Freeing-of-Assets” theory, what account would be credited above for $40,000?
3. Under the “Loan Proceeds” theory, what account would be credited above for $40,000?