Skysong Inc. owes Headlands Bank $228,000 plus $15,600 of accrued interest. The debt is a 10-year, 10% note. During 2020, Skysongs business declined due to a slowing regional economy. On December 31, 2020, the bank agrees to accept an old machine and cancel the entire debt. The machine has a cost of $436,000, accumulated depreciation of $255,000, and a fair value of $208,000. The bank plans to dispose of the machine at a cost of $7,500. Both Skysong and Headlands Bank prepare financial statements in accordance with IFRS 9.

1. Prepare the journal entries for Skysong Inc. and Headlands Bank to record this debt settlement. Assume Headlands had previously recognized an allowance for doubtful accounts for the impairment prior to the settlement.

a. Dec. 31, 2020

Skysong Inc.

b. Dec. 31, 2020

Headlands Bank

part 2: Assume that, instead of transferring the machine, Skysong decides to grant the bank 15,000 of its common shares, which have a fair value of $217,000. This is in full settlement of the loan obligation. Assuming that Headlands Bank treats Skysongs shares as FV-NI investments, prepare the entries to record the transaction for both parties. Assume Headlands had previously recognized an allowance for doubtful accounts for the impairment prior to the settlement.

a. Dec. 31, 2020

Skysong Inc.

b. Dec. 31, 2020

Headlands Bank