E & S Partnership purchased land for $500,000 on May 1, 20X1, paying $100,000 cash and giving a $400,000 note payable to Big State Bank. E & S made three annual payments on the note totaling $179,000, which included interest of $89,000. E & S then defaulted on the note. Title to the land was transferred by E & S to Big State, which canceled the note, releasing the partnership from further liability. At the time of the default, the fair value of the land approximated the note balance. In E & S's 20X4 income statement, what should the amount of the loss be?
A.
$279,000
B.
$221,000
Correct C.
$190,000
D.
$100,000
Because the fair value of the land approximated the balance due on the note, neither the debtor (E & S) nor the creditor (Big State) records a gain or loss on the settlement of the debt.
E & S, however, must record a gain or loss on the disposal of an asset (the land). Since the fair value of the land approximated the balance due on the note, the fair value must have declined from the purchase price (which is also the carrying value since land is not depreciable); therefore, the loss must be in the amount already paid on the purchase, or, $190,000 (the $100,000 payment and the $90,000 payments made on principal of the note (total payments – interest = $179,000 – $89,000 = $90,000)).
So my question regarding this is, am I wrong in finding this answer using the JE for this transaction? I guess right by figuring the debit is to the liability for 310,000 (the original 400,000 less the principal payment of 90,000) and the credit is to the land asset for 500,000. The loss is the plug in the transaction. I've seen it explained different ways but never with the entry.
FAR - 10/3/16
BEC - 69 - 10/31/16
AUD - November 2016
REG - December 2016
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