(Settlement of Debt) Larisa Nieland Company owes $200,000 plus $18,000 of accrued interest to First State Bank. The debt is a 10-year, 10% note. During 2007, Larisa Nieland’s business deteriorated due to a faltering regional economy. On December 31, 2007, First 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 market value of $190,000.

Instructions

(a) Prepare journal entries for Larisa Nieland Company and First State Bank to record this debt settlement.

(b) How should Larisa Nieland report the gain or loss on the disposition of machine and on restructuring of debt in its 2007 income statement?

(c) Assume that, instead of transferring the machine, Larisa Nieland decides to grant 15,000 shares of its common stock ($10 par) which has a fair market value of $190,000 in full settlement of the loan obligation. If First State Bank treats Larisa Nieland’s stock as a trading investment, prepare the entries to record the transaction for both parties.