Question

Exercise 14-21

Seaview Company owes $175,000 plus $15,200 of accrued interest to Indigo State Bank. The debt is a 10-year, 10% note. During 2020, Seaview’s business deteriorated due to a faltering regional economy. On December 31, 2020, NewCity State Bank agrees to accept an old machine and cancel the entire debt. The machine has a cost of $329,000, accumulated depreciation of $180,950, and a fair value of $152,000.

Part 1: Prepare journal entries for Seaview Company and NewCity State Bank to record this debt settlement. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

How should Seaview report the following in its 2020 income statement?

1.		Gain or loss on the disposition of machine		select between gain and loss Ordinary ExpenseOrdinary GainOrdinary IncomeOrdinary Loss
2.		Gain or loss on restructuring of debt		select between gain and loss Ordinary LossOrdinary IncomeOrdinary ExpenseOrdinary Gain

Part 2: Assume that, instead of transferring the machine, Seaview decides to grant 15,000 shares of its common stock ($10 par) which has a fair value of $152,000 in full settlement of the loan obligation. If NewCity State Bank treats Seaview's stock as a trading investment, prepare the entries to record the transaction for both parties. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Answer 1

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Part 1
	Account	Debit	Credot
Seaview Company	Note Payable	$               1,75,000
	Interest Payable	$                   15,200
	Accumulated Depreciation-Machinery	$               1,80,950
	Machinery		$   3,29,000
	Gain on disposal of machinery		$         3,950
	Gain on restructuring debt		$       38,200
Working:
	Gain on disposal of machinery
	$329,000-$180,950-$152,000	$                   (3,950)
	Gain on restructuring debt
	$175,000+$15,200-$152,000	$                   38,200
New City State Bank	Machinery	$               1,52,000
	Allowance for doubtful accounts	$                   38,200
	Notes Receivable		$   1,75,000
	Interest Receivable		$       15,200
	Gain on Disposal of machiner	Ordinary Gain
	Gain on restructuring debt	Ordinary Gain
Part 2
Seaview Company	Note Payable	$               1,75,000
	Interest Payable	$                   15,200
	Common Stock (15,000*$10)		$   1,50,000
	Addition Paid in capital ($152,000-$150,000)		$         2,000
	Gain on restructuring debt		$       38,200
New City State Bank	Investment (Trading)	$               1,52,000
	Allowance for doubtful accounts	$                   38,200
	Notes Receivable		$   1,75,000
	Interest Receivable		$       15,200