Question

Cullumber Company owes $210,000 plus $18,700 of accrued interest to Riverbed State Bank. The debt is a 10-year, 10% note. During 2017, Cullumber's business deteriorated due to a faltering regional economy. On December 31, 2017, Riverbed State Bank agrees to accept an old machine and cancel the entire debt. The machine has a cost of $398,000, accumulated depreciation of $218,900, and a fair value of $187,000. Prepare journal entries for Cullumber Company and Riverbed State Bank to record this debt settlement. (If no entry is required, select "No Entry" for the account titles and enter O for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Account Titles and Explanation Cullumber Company (Debtor No. Date Debit Credit 1. December 31, 2017 Riverbed State Bank (Creditor): 2. December 31, 2017

Answer 1

1. Journal entry in the books of Cullumber Company is as follows:

Working Notes:

(a) Computation of gain on disposal of machine:

Gain on disposal = Fair Value – (Cost – Accumulated depreciation)

                            = $187,000 – ($398,000 - $218,900)

                            = $7,900

(b) Computation of gain on debt restructuring:

Gain on debt restructuring = Amount of note payable + accrued interest – Fair value of machine

                                          = $210,000 + $18,700 - $187,000

                                          = $41,700

2. Journal entry in the books of Riverbed State Bank is as follows:

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