Question

Guido Properties owes First State Bank $60 million under a 7% note with two years remaining to maturity. Due to financial difficulties of Guido, the previous year’s interest ($4.2 million) was not received. The bank agrees to settle the note receivable and accrued interest receivable in exchange for land having a fair value of $44 million and a book value of $ 32 million.
Required:

Prepare all the journal entries required for the settlement on Guido’s books.

Answer 1

Answer:

Explanation:

The journal entries are shown below:

Notes payable A/c Dr $60,000,000

Interest payable A/c Dr $4,200,000

        To Land A/c $32,000,000

        To Gain on transfer of land $12,000,000

        To gain on settlement of debt $20,200,000

(Being all transactions are recorded and the remaining balance is credited to the gain on settlement of debt)

The Gain on transfer of land is computed below:

= $44 million - $32 million

= $12 million