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Mann, Inc., which owes Doran Co. $800,000 in notes payable with accrued interest

ID: 2420810 • Letter: M

Question

Mann, Inc., which owes Doran Co. $800,000 in notes payable with accrued interest of $72,000, is in financial difficulty. To settle the debt, Doran agrees to accept from Mann equipment with a fair value of $760,000, an original cost of $1,120,000, and accumulated depreciation of $260,000.

Instructions

(a) Compute the gain or loss to Mann on the settlement of the debt.

(b) Compute the gain or loss to Mann on the transfer of the equipment.

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

(d) Prepare the journal entry on Doran's books to record the settlement of the receivable.

Explanation / Answer

a. note payable $800000

accrued interest $72000

Total liability $872000

Fair Value of equipment = $760000

Gain on settlemnet is (872000-760000) = $112000

b.

Book value of equipent is (1120000-260000) = $860000

transfer of equipment agiainst $8720000 debt

Gain on transfer is $120000

c.

Note payable a/c dr. 800000

Accrued int. a/c Dr. 72000

equipment accoun a/c 860000

profit on settlement a/c 12000

Being debt settled by equipment transfer.

d.

equipment account a/c Dr. 760000

profit and loss a/c Dr. 112000

to Note receivable a/c 800000

to interess receivable a/c 720000

Being Doran settled the loan in the books and also recorded the loss on settlement.

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