E14-21B (Settlement of Debt) Nixim Company owes $800,000 plus $121,000 of accrued interest to 2nd State Bank. The debt is a 10-year, 10% note. During 2012, Nixim’s business deteriorated due to a faltering regional economy. On December 31, 2014, 2nd State

E14-21B (Settlement of Debt) Nixim Company owes $800,000 plus $121,000 of accrued interest to 2nd State Bank. The debt is a 10-year, 10% note. During 2012, Nixim’s business deteriorated due to a faltering regional economy. On December 31, 2014, 2nd State Bank agrees to accept some undeveloped land and cancel the entire debt. The land has a cost of $1,200,000, and a fair market value of $680,000.

Instructions

(a) Prepare journal entries for Nixim Company and 2nd State Bank to record this debt settlement.

(b) How should Nixim report the gain or loss on the disposition of land and on restructuring of debt in its 2014 income statement?

(c) Assume that, instead of transferring the land, Nixim decides to grant 200,000 shares of its common stock ($1 par) which has a fair value of $680,000 in full settlement of the loan obligation. If 2nd State Bank treats Nixim’s stock as a trading investment, prepare the entries to record the transaction for both parties.