Question

At January 1, 2018, Transit Developments owed First City Bank Group $600,000, under an 11% note with three years remaining to maturity. Due to financial difficulties, Transit was unable to pay the previous year’s interest. First City Bank Group agreed to settle Transit’s debt in exchange for land having a fair value of $450,000. Transit purchased the land in 2014 for $325,000. Required: Prepare the journal entry(s) to record the restructuring of the debt by Transit Developments. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Answer:

interest payable   66,000

note payable      384,000

       Land                            325,000

       Gain on disposal         125,000

Explanation:

600,000 x 11% = 66,000 interest payable

the land is being used to settle the note along with the accrued interest at the time:

the accounting  of Transit developments record the land at cost: 325,000

as the market valuye is 450,000 so a gain for 125,000 will be recognize.

450,000 market value - 66,000 interest payable: 384,000 payment on the note principal

the entry will write-off the interest payable, decrease the note by that amount and recognize the land gain on disposal