Question

Exercise 14-21 (Part Level Submission) Monty Company owes $225,000 plus $20,200 of accrued interest to Flounder...

Exercise 14-21 (Part Level Submission)

Monty Company owes $225,000 plus $20,200 of accrued interest to Flounder State Bank. The debt is a 10-year, 10% note. During 2020, Monty’s business deteriorated due to a faltering regional economy. On December 31, 2020, Flounder State Bank agrees to accept an old machine and cancel the entire debt. The machine has a cost of $317,000, accumulated depreciation of $174,350, and a fair value of $202,000.

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(a)

Prepare journal entries for Monty Company and Flounder State Bank to record this debt settlement. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

No.

Date

Account Titles and Explanation

Debit

Credit

Monty Company (Debtor):

1.

December 31, 2020

enter an account title to record the transaction for Monty Company (Debtor) on December 31, 2020

enter a debit amount

enter a credit amount

enter an account title to record the transaction for Monty Company (Debtor) on December 31, 2020

enter a debit amount

enter a credit amount

enter an account title to record the transaction for Monty Company (Debtor) on December 31, 2020

enter a debit amount

enter a credit amount

enter an account title to record the transaction for Monty Company (Debtor) on December 31, 2020

enter a debit amount

enter a credit amount

enter an account title to record the transaction for Monty Company (Debtor) on December 31, 2020

enter a debit amount

enter a credit amount

enter an account title to record the transaction for Monty Company (Debtor) on December 31, 2020

enter a debit amount

enter a credit amount

Flounder State Bank (Creditor):

2.

December 31, 2020

enter an account title to record the transaction for Flounder State Bank (Creditor) on December 31, 2020

enter a debit amount

enter a credit amount

enter an account title to record the transaction for Flounder State Bank (Creditor) on December 31, 2020

enter a debit amount

enter a credit amount

enter an account title to record the transaction for Flounder State Bank (Creditor) on December 31, 2020

enter a debit amount

enter a credit amount

enter an account title to record the transaction for Flounder State Bank (Creditor) on December 31, 2020

enter a debit amount

enter a credit amount

SHOW LIST OF ACCOUNTS

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(b)

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(c)

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Answer #1

Requirement A-1: Prepare the following journal entry in the books of debtor for the settlement of debt

Date Account Title and Explanation Debit Credit
Dec 31 Notes Payable $225,000
2020 Interest Payable $20,200
Accumulated Depreciation - Machinery $174,350
                         Machinery $317,000
                         Gain on Sale of Machinery $59,350
                         Gain on Restructuring of Debt $43,200
To record settlement of debt

Note Compute gain sale of machinery as follows

Particulars Amount Amount
Fair Value of Machinery $202,000
Deduct: Cost of Machinery $317,000
Less: Accumulated Depreciation - Machinery ($174,350) $142,650
Gain on Sale of Machinery $59,350

Compute gain on restructuring of debt as follows

Particulars Amount
Notes Payable $225,000
Add: Interest Payable $20,200
Deduct: Fair Value of Machinery ($202,000)
Gain on Restructuring of Debt $43,200

Requirement A-2: Prepare the following journal entry in the books of creditor for the settlement of notes receivable

Date Account Title and Explanation Debit Credit
Dec 31 Machinery $202,000
2020 Allowance for Doubtful Accounts $43,200
                     Notes Receivable $225,000
                     Interest Receivable $20,200
To record settlement of notes receivable

Notes: Compute allowance for doubtful accounts as follows

Particulars Amount
Notes Receivable $225,000
Add: Interest Receivable $20,200
Deduct: Fair Value of Machinery Received ($202,000)
Allowance for Doubtful Accounts $43,200
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