Question

Southfield Company reached an agreement with its bank to transfer a piece of land with a historical cost of $500,000 and a fair value of $1.2 million to the bank in full settlement of its outstanding loan principal plus accrued interest of $1.5 million. Prior to the transfer, Southfield should credit Multiple choice question. gain on disposal of land for $700,000 gain on disposal of land for $1 million gain on troubled debt restructuring for $1 million

Answer 1

Answer:

Southfield Company

Prior to the transfer, Southfield should credit

gain on disposal of land for $1 million.

Explanation:

a) Data and Calculations:

Historical cost of land = $500,000

Fair value of land = $1.2 million

Outstanding loan principal plus accrued interest = $1.5 million

There is a gain on disposal of $1 million ($1.5 million - $500,000)

b) With the transfer of resources in full settlement, the land account will be credited with $1.5 million while the Loan accounts are debited with $1.5 million.

This entry in the land account will give rise to a net credit balance of $1 million, which the gain on disposal, debited to the land account.

Therefore, the Gain on Disposal of Land will be credited with $1.5 million as a corresponding entry.