Cengagenowv2, 1 Term Printed Access Card For Wahlen/jones/pagach’s Intermediate Accounting: Reporting And Analysis, 2017 Update, 2nd
Cengagenowv2, 1 Term Printed Access Card For Wahlen/jones/pagach’s Intermediate Accounting: Reporting And Analysis, 2017 Update, 2nd
2nd Edition
ISBN: 9781337912259
Author: James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher: Cengage Learning
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Chapter 14, Problem 14P

1.

To determine

Prepare journal entries to record the debt restructuring agreement and all subsequent interest payments assuming the bank extends the repayment date as on 31st December 2019, forgives the accrued interest owed, reduces the principal by $200,000 and reduces the interest to 8%.

1.

Expert Solution
Check Mark

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 carrying value of note:

Carrying value of note as on 1.1.2016=Notes payable + Interest payable=$2,400,000+$34,031.82=$2,434,031.82

Calculate total amount to be repaid of notes payable.

Amount to be repaid =Principal + Interest=($2,400,000$200,000)+($2,200,000×8%×4)=$2,200,000+$704,000=$2,904,000

Therefore, no gain recognized by the debtor, because the repaid amount of notes is exceeds the current carrying value of the note and interest.

Calculate amount of restructuring agreement using effective interest rate method.

ParticularsAmount (A)Present value factor (B)Value of the Bonds (A × B)
Present value of principal$2,200,000 0.822702$1,809,944.44
Add: Present value of interest$176,000 3.545951$624,087.38
Restructuring agreement  $2,434,031.82

Table (1)

Note: The Present value of an ordinary annuity of $1 for 4 periods at 5% is 3.545951 (refer Table 4 in TVM Module). And the present value of $1 for 4 periods at 5% is 0.822702 (refer Table 3 in TVM Module).

Working note:

(1)Calculate present value interest amount.

Present value interest =Face value of bonds×Stated interest rate×Time period=$2,200,000×8%×1212=$176,000

Calculate interest expense and principal reduction using amortization schedule.

AMORTIZATION SCHEDULE - NOTES PAYABLE
DateCash (A)Interest expense ( B = Prior period D × 5%)Notes payable (C = A –B)Carrying Value of Note (D = Prior period D –C)
1/2/2016   $2,434,031.82
12/31/2016$176,000 $121,701.59 $54,298.41 $2,379,733.41
12/31/2017$176,000 $118,986.67 $57,013.33 $2,322,720.08
12/31/2018$176,000 $116,136.00 $59,864.00 $2,262,857.08
12/31/2019$2,376,000 $113,142.92 $2,262,857.08 $0.00

Table (2)

Prepare journal entries to record the debt restructuring agreement and all subsequent interest payments assuming the bank extends the repayment date as on 31st December 2016, forgives the accrued interest owed, reduces the principal by $200,000 and reduces the interest to 8%.

DateAccount titles and ExplanationDebitCredit
January 2, 2016Interest payable$34,031.82  
      Notes payable $34,031.82
 (To record transfer of accrued interest payable to notes payable)  
    
December 31, 2016Interest expense$121,71.59 
 Notes payable$54,298.41  
      Cash $176,000.00
 (To record payment of interest expense and interest payable)  
    
December 31, 2017Interest expense$118,986.67  
 Notes payable$57,013.33  
      Cash $176,000.00
 (To record payment of interest expense and interest payable)  
    
December 31, 2018Interest expense$116,136.00  
 Notes payable$59,864.00  
      Cash $176,000.00
 (To record payment of interest expense and interest payable)  
    
December 31, 2019Interest expense$113,142.92  
 Notes payable$2,262,857.08  
      Cash $2,376,000.00
 (To record payment of interest expense and interest payable)  

Table (3)

2.

To determine

Prepare journal entries to record the debt restructuring agreement and all subsequent interest payments assuming the bank extends the repayment date to December 31, 2019, forgives the interest owed, reduces the principal by $200,000, and reduces the interest rate to 1%.

2.

Expert Solution
Check Mark

Explanation of Solution

Calculate carrying value of note:

Carrying value of note as on 1.1.2016=Notes payable + Interest payable=$2,400,000+$34,031.82=$2,434,031.82

Calculate total amount to be repaid of notes payable.

Amount to be repaid =Principal + Interest=($2,400,000$200,000)+($2,200,000×1%×4)=$2,200,000+$88,000=$2,288,000

Calculate gain recognized by the debtor.

Gain recognized by the debtor=Carrying value of noteRepaid amount of notes payable=$2,434,031.82$2,228,000=$146,031.82

Therefore, gain recognized by the debtor is $146,031.82. Because the repaid amount of notes is lesser than the current carrying value of the note and interest.

Prepare journal entries to record the debt restructuring agreement and all subsequent interest payments assuming the bank extends the repayment date to December 31, 2019, forgives the interest owed, reduces the principal by $200,000, and reduces the interest rate to 1%.

DateAccount titles and ExplanationDebitCredit
January 2, 2016Interest payable$34,031.82  
      Notes payable $34,031.82
 (To record transfer of accrued interest payable to notes payable)  
    
January 2, 2016Notes payable$146,031.82  
      Gain on debt restructure $146,031.82
 (To record gain on debt restructuring)  
    
December 31, 2016Notes payable$22,000  
      Cash $22,000
 (To record payment of notes payable)  
    
December 31, 2017Notes payable$22,000  
      Cash $22,000
 (To record payment of notes payable)  
    
December 31, 2018Notes payable$22,000  
      Cash $22,000
 (To record payment of notes payable)  
    
December 31, 2019Notes payable$22,000  
      Cash $22,000
 (To record payment of notes payable)  

Table (4)

3.

To determine

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.

Expert Solution
Check Mark

Explanation of Solution

Calculate gain recognized by the debtor.

Gain recognized by the debtor =Carrying value of noteFair value of stock=$2,434,031.82(160,000shares×$14.50)=$2,434,031.82$2,320,000.00=$114,031.82

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.

DateAccount titles and ExplanationDebitCredit
January 2, 2016Notes payable$2,400,000  
 Interest payable$34,031.82  
      Gain on Debt restructure $114,031.82
      Common stock $800,000
      Additional paid in capital on common stock (balancing figure) $1,520,000.00
 (To record payment of debt restructuring)  

Table (5)

Working note:

(2)Calculate common stock.

Common stock =Number of shares×Par value of common stock=160,000 shares×$5=$800,000

4.

To determine

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.

Expert Solution
Check Mark

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.

DateAccount titles and ExplanationDebitCredit
January 2, 2016Notes payable$2,400,000  
 Interest payable$34,031.82  
      Gain on debt restructure $134,031.82
      Gain on disposal of land $100,000
      Land $2,200,000.00
 (To record payment of debt restructuring)  

Table (6)

Working notes:

(3)Calculate gain on debt restructure.

Gain on debt restructure=Fair value of landCost of land=$2,300,000$2,200,000=$100,000

(4)Calculate gain recognized by the debtor.

Gain recognized by the debtor(transfer of land))=Carrying value of note Fair value of land=$2,434,031.82$2,300,000=$134,031.82

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Chapter 14 Solutions

Cengagenowv2, 1 Term Printed Access Card For Wahlen/jones/pagach’s Intermediate Accounting: Reporting And Analysis, 2017 Update, 2nd

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