Question

Burwood Company loaned $654,000 to Garran Company In financial difficulty it cannot meet its loan obligations, to settle the debt, Burwood agrees to accept from Garran equipment with a fair value of $570,000 in full settlement of the loan obligation. The equipment has a carrying value of $645,000 on the books of Garran Company Compute the gain or loss to Garran on the settlement of the debt.

Answer 1

Garran Company incurs a loss of $75,000 on the debt settlement by surrendering equipment valued at $570,000 to settle a liability that had a carrying value of $645,000 on their books.

Step-by-step explanation:

To compute the gain or loss Garran Company realizes on the settlement of debt with Burwood Company, we need to compare the fair value of the equipment given in settlement to its carrying value on Garran's books.

The carrying value of the equipment is $645,000, and the fair value of the equipment is $570,000. The loss is determined by subtracting the fair value from the carrying value, which amounts to $75,000 ($(645,000 - 570,000)$).

Therefore, Garran Company would record a loss of $75,000 on the settlement of its debt, as they gave up an asset worth more on their books than what they received in value for the debt.