Cole, Inc., which owes Henry Co. $600,000 in notes payable with accrued interest of $54,000, is in financial difficulty. To settle the debt, Henry agrees to accept from Cole equipment with a fair value of $570,000, an original cost of $840,000, and accumulated depreciation of $195,000.
(a) Compute the gain or loss to Cole on the settlement of the debt.
(b) Compute the gain or loss to Cole on the transfer of the equipment.
(c) Prepare the journal entry on Cole's books to record the settlement of this debt.
See the attached Excel file for computations.
This is a very interesting problem and appropriately timed in current economic times.
Facts and Conditions:
1. The transfer of equipment in exchange for a debt is still a sale of equipment subject to gain or loss on sale.
2. The ...
The solution presents the entries for all three parts of the problem in T-account format. Explanations are provided for easier understanding of the transaction.