Strickland Company owes $200,000 plus $18,000 of accrued interest to Moran State Bank. The debt is a 10-year, 10% note. During 2022, Strickland’s business deteriorated due to a faltering regional economy. On December 31, 2022, Moran State Bank agrees to accept an old machine and cancel the entire debt. The machine has a cost of $390,000, accumulated depreciation of $221,000, and a fair value of $180,000.

Instructions

a. Prepare journal entries for Strickland Company to record this debt settlement.

b. How should Strickland report the gain or loss on the disposition of machine and on restructuring of debt in its 2022 income statement?

c. Assume that, instead of transferring the machine, Strickland decides to grant 15,000 of its ordinary shares ($10 par), which have a fair value of $180,000, in full settlement of the loan obligation. Prepare the entries to record the transaction.