Question

Exercise 14-21 Larkspur Company owes $222,000 plus $20,600 of accrued interest to Cullumber State Bank. The debt is a 10-year, 10% note. During 2017, Larkspur's business deteriorated due to a faltering regional economy. On December 31, 2017, Cullumber State Bank agrees to accept an old machine and cancel the entire debt. The machine has a cost of $344,000, accumulated depreciation of $189,200, and a fair value of $206,000. Prepare journal entries for Larkspur Company and Cullumber State Bank to record this debt settlement. (If no entry is required, select "No Entry" for the account tities and enter for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Larkspur Company Dear

Answer 1

Debit Credit No. Date Account Titles and Explanation Larkspur Company (Debtor) 1 December 31, 2017 Note Payable Interest Payable Accumulated Depreciation - Machine Machine Gain on Disposition of Machine ($206,000-($344,000-189,200)] Gain on Debt Restructuring [($222,000+$20,600)-$206,000] (To record the debt settelement) $ 222,000 $ 20,600 $ 189,200 $ 344,000 $ 51,200 $ 36,600 $ 200,000 $ 36,600 Cullumber State Bank (Creditor) 2 December 31, 2017 Machine Allowance for Doubtful accounts (bal. fig) Notes Receivables Interest Receivable (To record the debt settelement) $ 222,000 $ 20,600 Larkspur should report the Gain on disposition of machine and gain on debt restructuring as ordinary gain in its income statement. 1 Gain on Disposition of Machine = $51,200 2 Gain on restructuring of debt = $36,600