Strickland Company owes $204,900 plus $18,540 of accrued interest to Moran State Bank. The debt is a 10-year, 10% note. During 2014, Stricklands business deteriorated due to a faltering regional economy. On December 31, 2014, Moran State Bank agrees to accept an old machine and cancel the entire debt. The machine has a cost of $394,200, accumulated depreciation of $216,810, and a fair value of $185,400.

1. Prepare journal entries for Strickland Company and Moran State Bank to record this debt settlement.

2. Assume that, instead of transferring the machine, Strickland decides to grant 13,300 shares of its common stock ($10 par) which has a fair value of $185,400 in full settlement of the loan obligation. If Moran State Bank treats Stricklands stock as a trading investment, prepare the entries to record the transaction for both parties.

Strikland company (debtor)

moran state bank (creditor)