Question

Question 5 Fredericton owes Ottawa a $1,200,000, 12%, three-year note dated December 31, 2017. Fredericton has been experiencing financial difficulties, and still owes accrued interest of $144,000 on this note at December 31, 2019. Under a troubled debt restructuring, on December 31, 2019, Ottawa agrees to settle the note plus the accrued interest for land that Fredericton owns, which has a fair value of $1,080,000. Fredericton's original cost of the land is $870,000. Ignoring income taxes, on its 2019 income statement. Analyze the accounting issue and prepare any journal entries you deem necessary.

Answer 1

A troubled debt restructuring transaction can involve many possible ways of settlement solutions, including the transfer of tangible or intangible assets, the granting of an equity interest, an interest rate reduction, an extended maturity date at a below-market interest rate, a reduction in the face amount of the debt, etc. The accounting for these restructurings varies, depending upon the nature of the transaction,

In case of Full settlement with assets, Entity should recognize a gain on the transaction in the amount by which the carrying amount of the payable exceeds the fair value of the assets transferred.

Below could be accounting entry in this case.

Description	Debit $	Credit $	Notes
Note payable (12% 3 Year)	1,200,000		[Book value of Note payable]
Interest payable	144,000		[Book value interest accrued on Note payable]
Property - Land	210,000		[Fair value gain on property (1,080,000 - 870,000)]
Property - Land		1,080,000	[Fair value of Property - Land]
Gain on transfer of Property		210,000	[Gain on property (1,080,000 - 870,000)]
Gain on debt settlement		264,000	[Gain on debt settlement (1,200,000+144,000 - 1,080,000)]
	1,554,000	1,554,000