Concept explainers
1.
Prepare
1.
Explanation of Solution
Troubled Debt Restructuring: A troubled debt restructuring happens if a creditor, for legal or economic reasons associated to a debtor’s financial complications, grants a concession to a debtor that would not be otherwise considered.
Calculate amount of restructured loan using effective interest rate method.
Particulars | Amount (A) | Present value factor (B) | Value of the Bonds (A × B) |
Present value of principal | $2,200,000 | 0.683013 | $1,502,628.60 |
Add: Present value of interest | $176,000 | 3.169865 | $557,89624 |
Value of restructured loan | $2,060,524.84 |
Table (1)
Note: The Present value of an ordinary annuity of $1 for 4 periods at 10% is 3.169865 (refer Table 4 in TVM Module). And the present value of $1 for 4 periods at 10% is 0.683013 (refer Table 3 in TVM Module).
Working note:
(1)Calculate present value interest amount.
Calculate interest revenue and principal adjustment.
AMORTIZATION SCHEDUE - NOTES PAYABLE | ||||
Date | Cash (A) | Interest revenue ( B = Prior period D × 10%) | Notes receivable ( C = B–A) | Carrying value of note (D = Prior period D + C) |
1/2/2019 | $2,060,524.84 | |||
12/31/2019 | $176,000 | $206,052.48 | $30,052.48 | $2,090,577.32 |
12/31/2020 | $176,000 | $209,057.73 | $33,057.73 | $2,123,635.06 |
12/31/2021 | $176,000 | $212,363.51 | $36,363.51 | $2,159,998.56 |
12/31/2022 | $2,376,000 | $216,001.44 | ($2,159,998.56) | $0.00 |
Table (2)
Prepare journal entries to record the debt restructuring agreement and all subsequent interest received assuming the bank extends the repayment date as on 31st December 2022, forgives the accrued interest owed, reduces the principal by $200,000 and reduces the interest to 8%.
Date | Account titles and Explanation | Debit | Credit |
January 2, 2019 | Loss on restructured loan | $373,506.98 | |
Interest receivable | $34,031.82 | ||
Notes receivable | $339,475.16 | ||
(To record loss on restructured loan | |||
December 31, 2019 | Cash | $176,000 | |
Notes receivable | $30,052.48 | ||
Interest revenue | $206,052.48 | ||
(To record receipt of interest revenue) | |||
December 31, 2020 | Cash | $176,000 | |
Notes receivable | $33,057.73 | ||
Interest revenue | $209,057.73 | ||
(To record receipt of interest revenue) | |||
December 31, 2021 | Cash | $176,000 | |
Notes receivable | $36,363.51 | ||
Interest revenue | $212,363.51 | ||
(To record receipt of interest revenue) | |||
December 31, 2022 | Cash | $2,376,000.00 | |
Notes receivable | $216,001.44 | ||
Interest revenue | $2,159,998.56 | ||
(To record receipt of interest revenue) |
Table (3)
2.
Prepare journal entries to record the debt restructuring agreement and all subsequent interest received assuming the bank extends the repayment date to December 31, 2022, forgives the interest owed, reduces the principal by $200,000, and reduces the interest rate to 1%.
2.
Explanation of Solution
Calculate amount of restructured loan using effective interest rate method.
Particulars | Amount (A) | Present value factor (B) | Value of the Bonds (A × B) |
Present value of principal | $2,200,000 | 0.683013 | $1,502,628.60 |
Add: Present value of interest | $22,000 | 3.169865 | $69,737.03 |
Value of restructured loan | $1,572,365.63 |
Table (4)
Note: The Present value of an ordinary annuity of $1 for 4 periods at 10% is 3.169865 (refer Table 4 in TVM Module). And the present value of $1 for 4 periods at 10% is 0.683013 (refer Table 3 in TVM Module).
Working note:
(1)Calculate present value interest amount.
Calculate interest revenue and principal adjustment.
AMORTIZATION SCHEDUE - NOTES PAYABLE | ||||
Date | Cash (A) | Interest revenue ( B = Prior period D × 10%) | Notes receivable ( C = B–A) | Carrying value of note (D = Prior period D + C) |
1/2/2019 | $1,572,365.63 | |||
12/31/2019 | $22,000 | $157,236.56 | $135,236.56 | $1,707,602.19 |
12/31/2020 | $22,000 | $170,760.22 | $148,760.22 | $1,856,362.41 |
12/31/2021 | $22,000 | $185,636.24 | $163,636.24 | $2,019,998.65 |
12/31/2022 | $2,222,000 | $202,001.35 | ($2,019,998.65) | $0.00 |
Table (5)
Prepare journal entries to record the debt restructuring agreement and all subsequent interest received assuming the bank extends the repayment date to December 31, 2022, forgives the interest owed, reduces the principal by $200,000, and reduces the interest rate to 1%.
Date | Account titles and Explanation | Debit | Credit |
January 2, 2019 | Loss on restructured loan | $861,666.19 | |
Interest receivable | $34,031.82 | ||
Notes receivable | $827,634.37 | ||
(To record loss on restructured loan | |||
December 31, 2019 | Cash | $22,000.00 | |
Notes receivable | $135,236.56 | ||
Interest revenue | $157,236.56 | ||
(To record receipt of interest revenue) | |||
December 31, 2020 | Cash | $22,000 | |
Notes receivable | $148,760.22 | ||
Interest revenue | $170,760.22 | ||
(To record receipt of interest revenue) | |||
December 31, 2021 | Cash | $22,000 | |
Notes receivable | $163,636.24 | ||
Interest revenue | $185,636.24 | ||
(To record receipt of interest revenue) | |||
December 31, 2022 | Cash | $2,222,000.00 | |
Notes receivable | $2,019,998.65 | ||
Interest revenue | $202,001.35 | ||
(To record receipt of interest revenue) |
Table (6)
3.
Prepare journal entries to record the debt restructuring agreement assuming the bank accepts 160,000 shares of Corporation O, par value of common stock, which is currently selling for $14.50 per share, in full settlement of the debt.
3.
Explanation of Solution
Calculate loss recognized by the creditor.
Prepare journal entries to record the debt restructuring agreement assuming the bank accepts 160,000 shares of Corporation O, par value of common stock, which is currently selling for $14.50 per share, in full settlement of the debt.
Date | Account titles and Explanation | Debit | Credit |
January 2, 2019 | Investment in Company O | $2,320,000.00 | |
Loss on restructured loan | $114,031.82 | ||
Notes receivable | $2,400,000.00 | ||
Interest receivable | $34,031.82 | ||
(To record full settlement of debt restructuring) |
Table (7)
4.
Prepare journal entries to record the debt restructuring agreement assuming the bank accepts land with a fair value of $2,300,000 in full settlement of the debt. The land is being carried on Corporation O’s books at a cost of $2,200,000.
4.
Explanation of Solution
Prepare journal entries to record the debt restructuring agreement assuming the bank accepts land with a fair value of $2,300,000 in full settlement of the debt. The land is being carried on Corporation O’s books at a cost of $2,200,000.
Date | Account titles and Explanation | Debit | Credit |
January 2, 2019 | Land | $2,300,000.00 | |
Loss on restructured loan | $134,031.82 | ||
Notes receivable | $2,400,000.00 | ||
Interest receivable | $34,031.82 | ||
(To record full settlement of debt restructuring) |
Table (8)
(4)Calculate gain recognized by the creditor.
Want to see more full solutions like this?
Chapter 14 Solutions
Interm.acct.:reporting.(ll)-w/access
- On January 1, 2019, Northfield Corporation becomes delinquent on a 100,000, 14% note to First National Bank, on which 16,651 of interest has accrued. On January 2, 2019, the bank agrees to restructure the note. It forgives the accrued interest, extends the repayment date to December 31, 2021, and reduces the interest rate to 10%. Required: Prepare a schedule for Northfield to compute the annual interest expense in regard to the preceding note for each year of the restructuring agreement.arrow_forwardDisclosure of Debt On May 1, 2019, Ramden Company issues 13% bonds with a face value of 2 million. The bond contract calls for retirement of the bonds in periodic installments of 200,000, starting on May 1, 2020, and continuing on each May 1 thereafter until all bonds are retired. Required: How would the preceding information appear in Ramdens balance sheets on December 31, 2019, and 2020?arrow_forwardInterest-Bearing and Non-Interest-Bearing Notes On December 11, 2019, Hooper Inc. made a credit sale to Marshall Company and required Marshall to sign a 12,000,60-day note. Required: Prepare the journal entries necessary to record the receipt of the note by Hooper, the accrual of interest on December 31, 2019, and the customers repayment on February 9, 2020, assuming: 1. Interest of 12% was in addition to the face value of the note. 2. The note was issued as a 12,000 non-interest-bearing note with a present value of 11,765. The implicit interest rate on the note receivable was 12%. Assume a 360-day year. (Round to the nearest dollar.)arrow_forward
- Anderson Air is a customer of Handler Cleaning Operations. For Anderson Airs latest purchase on January 1, 2018, Handler Cleaning Operations issues a note with a principal amount of $1,255,000, 6% annual interest rate, and a 24-month maturity date on December 31, 2019. Record the journal entries for Handler Cleaning Operations for the following transactions. A. Entry for note issuance B. Subsequent interest entry on December 31, 2018 C. Honored note entry at maturity on December 31, 2019arrow_forwardNon-Interest-Bearing Notes Payable On November 16, 2019, Clear Glass Company borrowed 20,000 from First American Bank by issuing a 90-day, non-interest-bearing note. The bank discounted this note at 12% and remitted the difference to Clear Glass. Required: 1. Prepare the journal entries of Clear Glass to record the preceding information, the related calendar year-end adjusting entry, and payment of the note at maturity. 2. Show how the preceding items Would be reported on the December 31, 2019, balance sheet. 3. Next Level What is Clear Glass Companys effective interest rate?arrow_forwardRefer to the information in RE 13-3. Assume that on December 31, 2019, Wolfpack received interest on the Todd Corporation bonds. Wolfpack uses the straight-line method to amortize premiums and discounts. Prepare the December 31 journal entry to record the receipt of the interest. On July 1, 2019, Wolfpack Corporation purchases securities which it intends to buy and sell frequently. These securities consisted of todd Corporation 10%, 5-year bonds with a face value of 20,000 which were purchased for 18,500. Prepare the july 1 journal entry to record the purchase of these trading securities.arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage LearningCornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningPrinciples of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College