USA Discharged AP debt - how?

NSL

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Problem: Debtor has carried a debt on Accounts Payable for several months while going through bankruptcy. The debt was recently discharged. The typical method to write off an AP entry is to

CR Accounts Payable
DR Other Income

In this case, however, such a procedure would misrepresent the debtor’s financial position by treating the discharged debt as income. The debtor has not received any money he has only been relieved of the debt.

Q: What account should be used to balance the discharged debt?

CR Accounts Payable
DR what?

Also, in the simplest sense, it seems to me that after the write off, Debtor’s Liabilities would be zero, and Capital/Retained Earnings should only reflect Debtor’s assets; all other things being unchanged. Is this correct?
 
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kirby

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I would reverse the original AP entry
DR AP
CR the original expense acct
and yes that will increase income by reducing expense but that is what happened.
Note if you had a mortgage and it was discharged in BK the lender would send you a 1099 for the "income" from the removal of the debt. And that would be taxable income to you
 

NSL

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Thanks, kirby,
I understand the 1099 issue with a mortgage. To put it in layman's terms: The debtor received value (products/services) that he didn't pay for. No different than if he were given the equivalent amount in cash. My concern is I don't want the "income" to show on his Balance Sheet, thus inflating his net worth. I'll try your suggestion and see what happens.
 

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