Question

Gottlieb Co. owes \(199,800 to Ceballos Inc. The debt is a 10-year, 11% note. Because Gottlieb Co. is in financial trouble, Ceballos Inc. agrees to accept some land and cancel the entire debt. The property has a book value of \)90,000 and a fair value of $140,000.

Instructions

1. Prepare the journal entry on Gottlieb’s books for debt restructure.
2. Prepare the journal entry on Ceballos’s books for debt restructure

Short answer

1. Gain on the restructuring of debt is $59,800.
2. Notes receivable is$199,800.

Step-by-step solution

Meaning of Fair value

Fair value is the amount that two parties, preferably in an active market, are willing to exchange for an asset or liability. In this case, supply and demand will probably impact the value of the asset under consideration.

(a) Preparing journal entry

Gottlieb Co.’s entry:

Date	Particulars	Debit ($)	Credit ($)
	Notes payable	199,800
	Land		90,000
	Gain on disposal of land $\left(\$140,000-\$90,000\right)$		50,000
	Gain on the restructuring of debt role="math" localid="1659071798050" $\left(\$199,800-\$140,000\right)$		59,800

(b) Preparing journal entry

Ceballos’s Inc. entry

Date	Particulars	Debit ($)	Credit ($)
	Land	140,000
	Allowance for doubtful accounts	59,800
	Notes receivables		199,800