[Anonymous]

I’m one of those people who has to see the journal entry and T-account to figure things out and this one has me at a complete loss.

Ace has land with a carrying amount of $75,000 and FV of $100,000. The bank loans them $150,000 using the land as collateral. What is their gain?

I know that to put the note on the books it’s:

Cash (assuming they got cash) $150,000

Note Payable $150,000

To increase the land to FV:

Land $25,000

Gain $25,000

The answer is $50,000 so there has to be another journal entry that I am missing. What is it?

[kmwgrace]

This is just an educated guess but if the bank was willing to loan $150k with only the land as collateral wouldn't that mean that the bank saw the market value of the land as being $150, so the adjustment to increase the land to FV would be $50k…?

There's no explanation in the software you're using for the MCQ's?

~ Kate... MTX!
CPA exam on hold while I homeschool my 6 year old!

[Anonymous]

There is an explanation but no journal entries. The explanation says $150,000 Note Proceeds – $100,000 FV of land = $50,000 gain. But the land didn't increase $50,000 from their original book value it increased $75,000. That is why I am confused. Seeing the journal entries helps me understand what is going on. I guess this is just one of those things that I am over analyzing and should just take at face value. Thanks for your help.

[kmwgrace]

Oh wait… I see it now! The carrying value – the amt on the books – was $75 but the FV was on the books at $100 so when they got the loan for $150 they had to write up the FV from $100 to $150 so the gain is on that increase! The carrying value is just extraneous information.

~ Kate... MTX!
CPA exam on hold while I homeschool my 6 year old!

[Anonymous]

I will preface my answer by saying that I don't completely understand what's going on in the problem. I remember this type of question from the Wiley book as being the debt was settled by transferring the land, not taking a loan out with the land as collateral.

With that being said, here's my interpretation…

I don't really agree with kmwgrace's statement that the CV is extraneous information. You do need that to be able to solve the problem. There are 2 different types of gains in this transaction – the gain on the transfer of the asset and the gain on the debt restructure. The gain on the transfer of the asset is $25,000 and the gain on the debt restructure is $50,000. I believe the journal entries would be…

dr. Land 25,000

cr. Gain on transfer of assets 25,000 ( you correctly stated this above)

dr. Loan Payable (or possibly cash?) 150,000

cr. Land 100,000

cr. Gain on Debt Restructure 50,000

Again, I don't really understand the problem because I learned it this way from the Wiley book so I'm not sure if this even helps. Plus they are using the land as collateral and not transferring it according to your problem, so taking the land off the books would not be correct if it's just collateral. Are you using Becker?

[oneFREAKINGpoint]

ASC 860-30-30 “Noncash collateral recognized by the secured party as its asset…that the secured party has not already sold shall be initially measured at fair value”

This problem makes sense to me, but what would the journal entry be to adjust the land to FV of $100,000 from $75,000 (and when would this be done)?

dr – Land 25,000

cr – ???? 25,000

And then this?

dr – Cash 150,000

dr – Land 50,000 –> adjusting it from 100,000 to 150,000

cr – N/P 150,000

cr – Gain on fv adjust 50,000

I'm terrible with journal entries and am trying to get better about using/understanding them…thanks in advance 🙂

[oneFREAKINGpoint]

@ apbandj – I'm in agreement that the land shouldn't be taken off the books if it's collateral, but doesn't your second journal entry take the land off the books?

[Anonymous]

OMG @onefreakingpoint – your 2nd journal entry makes total sense to answer the OP's question!!!!! Good job! (and yes, my J/E does take the land off the books – that's why I added in all those disclaimers…)

I think your first journal entry would be a credit to a Gain of some sort.

[Anonymous]

I feel like such a horses behind right now! I didn't give the complete question. The complete question wanted to know what the gain on the restructuring would be. That gain is $50,000. I was getting all knotted up over the increase in the carrying value of the land which is an ORDINARY gain! I didn't RTFQ. They didn't ask about the ordinary gain just the gain on restructuring. So here it goes if anyone is interested:

Dr Land $25,000

Cr ORDINARY GAIN $25,000

That brings the carrying value of the land to the FMV.

Dr Cash $150,000

Dr Land $50,000** I'm assuming that this is supposed to be land.

Cr Notes payable $150,000

Cr Gain on RESTRUCTURING $50,000

My goodness this test has a way of making you look and feel like such an idiot! Thanks everyone for your help! I'm using Wiley by the way and not Becker but I found the answer in a book that I bought for my Kindle called “The Vest Pocket CPA”. Boy was that ever $15.95 well spent!!!

[oneFREAKINGpoint]

@ apbandj – Does it? Haha, awesome, thanks. 🙂

I'd still love to know what type of gain on that first one is for though. Can't seem to find it in the codification or Becker…

[oneFREAKINGpoint]

@ Kricket THANK YOU! I can sleep easier now. ;D

[Anonymous]

@ onefreakingpoint – and you said you aren't good at J/E's???? I don't believe that 🙂

[Author]

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