Purpose: This exercise will illustrate the accounting for a transfer of noncash assets to settle a debt obligation in a troubled debt situation.
Boston Co. owes $194,400 to San Diego Trust Co. The debt is a 10-year, 8% note. Because Boston Co. is in financial trouble, San Diego agrees to accept some property and cancel the entire debt. The property has a cost of $150,000, accumulated depreciation of $80,000, and a fair market value of $110,000.
Instructions
(a) Prepare the journal entry on Boston's books for the debt restructure.
(b) Prepare the journal entry on San Diego's books for the debt restructure.