Question

Show Attempt History Current Attempt in Progress Larkspur Inc. owes Pearl Bank $205,000 plus $19,100 of accrued interest. The debt is a 10-year 10% note. During 2020, Larkspur's business declined due to a slowing regional economy. On December 31, 2020, the bank agrees to accept an old machine and cancel the entire debt. The machine has a cost of $400.000, accumulated depreciation of $229,000, and a fair value of $185,000. The bank plans to dispose of the machine at a cost of $6,200. Both Larkspur and Pearl Bank prepare financial statements in accordance with IFRS 9. Your answer is correct. Prepare the journal entries for Larkspur Inc. and Pearl Bank to record this debt settlement. Assume Pearl had previously recognized an allowance for doubtful accounts for the impairment prior to the settlement. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter for the amounts.) Debit Credit Date Account Titles and Explanation Larkspur Inc. Dec. 31, 2020 Notes Payable 205000 19100 Interest Payable 229000 Accumulated Depreciation - Machinery 400000 Machinery 1400

Answer 1

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Part a
Larkspur Books
Dec 31 2020	Notes Payable	$   205,000
	Interest Payable	$      19,100
	Accumulated Depreciation—Machinery	$   229,000
	Machinery		$   400,000
	Gain on Disposal of Machinery $185,000-($400,000-$229,000)		$      14,000
	Gain on Restructuring of Debt ($205,000+$19,100)-$185,000		$      39,100
Pearl Bank
Dec 31 2020	Machinery (Fair Value)	$   185,000
	Allowance for Doubtful Accounts	$      39,100
	Notes Receivable		$   205,000
	Interest Receivable		$      19,100
Part b
Larkspur Books
Dec 31 2020	Notes Payable	$   205,000
	Interest Payable	$      19,100
	Common Shares		$   196,000
	Gain on Restructuring of Debt		$      28,100
Pearl Bank
Dec 31 2020	FV-NI Investment	$   196,000
	Allowance for Doubtful Accounts	$      28,100
	Notes Receivable		$   205,000
	Interest Receivable		$      19,100