Question 11) Elton, Inc., which owes Boston Co. $900,000 in notes payable, is in

Question

Question 11) Elton, Inc., which owes Boston Co. $900,000 in notes payable, is in financial difficulty. To eliminate the debt, Boston agrees to accept from Elton land having a fair market value of $680,000 and a recorded cost of $510,000.

Instructions:

(a) Compute the amount of gain or loss to Elton, Inc. on the transfer (disposition) of the land.

(b) Compute the amount of gain or loss to Elton, Inc. on the settlement of the debt.

(c) Prepare the journal entry on Elton's books to record the settlement of this debt.

(d) Compute the gain or loss to Boston Co. from settlement of its receivable from Elton.

(e) Prepare the journal entry on Boston's books to record the settlement of this receivable.

Explanation / Answer

a)Gain or loss on transfer of land

Fair market value -$680000 and Book value or cost - $ 510000

Thus Elton Inc had a gain of 680000 - 510000 =$170000 on transfer of land.

b) On the Settlement of Debt , Elton inc had a gain of $900000 - $680000 = $220000

c) Notes Payable A/c dr $900000

   To Land A/c    $680000

To Gain on settelment of land $220000

d) There was a loss to boson Inc of $220000 from settlement of debt.

e) Land A/c Dr $6800000

Loss on transfer of land dr $220000

To Notes Payable A/c $900000

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