Supposed B borrows $100,000 from L and uses it to drill an oil well. B hits a dry hole and loses the entire $100,000 investment. Although B is solvent, L discharges the $40,000 of the debt.

Journal entries to record these events might look like this:

Cash $100,000

Debt payable $100,000

Loss on oil well $100,000

Cash $100,000

Debt payable $40,000

$40,000

1. Under the Whole Transaction theory, what account would be credited above for $40,000?
2. Under the Freeing-of-Assets theory, what account would be credited above for $40,000?
3. Under the Loan Proceeds theory, what account would be credited above for $40,000?