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Chapter 14: Q26E (page 759)

Gottlieb Co. owes \(199,800 to Ceballos Inc. The debt is a 10-year, 11% note. Because Gottlieb Co. is in financial trouble, Ceballos Inc. agrees to accept some land and cancel the entire debt. The property has a book value of \)90,000 and a fair value of $140,000.

Instructions

  1. Prepare the journal entry on Gottlieb’s books for debt restructure.
  2. Prepare the journal entry on Ceballos’s books for debt restructure

Short Answer

Expert verified
  1. Gain on the restructuring of debt is $59,800.
  2. Notes receivable is$199,800.

Step by step solution

01

Meaning of Fair value

Fair value is the amount that two parties, preferably in an active market, are willing to exchange for an asset or liability. In this case, supply and demand will probably impact the value of the asset under consideration.

02

(a) Preparing journal entry

Gottlieb Co.’s entry:

Date

Particulars

Debit ($)

Credit ($)

Notes payable

199,800

Land

90,000

Gain on disposal of land

($140,000-$90,000)

50,000

Gain on the restructuring of debt

role="math" localid="1659071798050" ($199,800-$140,000)

59,800

03

(b) Preparing journal entry

Ceballos’s Inc. entry

Date

Particulars

Debit ($)

Credit ($)

Land

140,000

Allowance for doubtful accounts

59,800

Notes receivables

199,800

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Most popular questions from this chapter

Using the same information as in E14-22, answer the following questions related to American Bank (creditor).

Instructions

  1. What interest rate should American Bank use to calculate the loss on the debt restructuring?
  2. Compute the loss that American Bank will suffer from the debt restructuring. Prepare the journal entry to record the loss.
  3. Prepare the interest receipt schedule for American Bank after the debt restructuring.
  4. Prepare the interest receipt entry for American Bank on December 31, 2019.
  5. What entry should American Bank make on January 1, 2021?

Assume the bonds in BE14-6 were issued for $644,636 and the effective-interest rate is 6%. Prepare the company’s journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry.

E14-2 (L01) (Classification) The following items are found in the financial statements.

(a) Discount on bonds payable.

(b) Interest expense (credit balance).

(c) Unamortized bond issue costs.

(d) Gain on repurchase of debt.

(e) Mortgage payable (payable in equal amounts over next 3 years).

(f) Debenture bonds payable (maturing in 5 years).

(g) Notes payable (due in 4 years).

(h) Premium on bonds payable.

(i) Bonds payable (due in 3 years).

Instructions

Indicate how each of these items should be classified in the financial statements.

Question: What is the required method of amortizing discount and premium on bonds payable? Explain the procedures.

What is meant by “accounting symmetry” between the entries recorded by the debtor and creditor in a troubled-debt restructuring involving a modification of terms? In what ways is the accounting for troubled-debt restructurings non-symmetrical?
See all solutions

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