Larkspur Corporation is having financial difficulty and therefore has asked Cullumber National Bank to restructure its $6.05 million note outstanding. The present note has 3 years remaining and pays a current rate of interest of 10%. The present market rate for a loan of this nature is 12%. The note was issued at its face value. The following are four independent situations. Prepare the journal entry that Larkspur and Cullumber National Bank would make for each of these restructurings. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.) (a) Cullumber National Bank agrees to take an equity interest in Larkspur by accepting common stock valued at $3,756,000 in exchange for relinquishing its claim on this note. The common stock has a par value of $1,757,000. (b) Cullumber National Bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book value of $3,181,000 and a fair value of $4,194,000. (c) Cullumber National Bank agrees to modify the terms of the note, indicating that Larkspur does not have to pay any interest on the note over the 3-year period. (d) Cullumber National Bank agrees to reduce the principal balance due to $5,041,667 and require interest only in the second and third year at a rate of 10%. Please fill in all the boxes depicted in both images- thank you!

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Larkspur Corporation is having financial difficulty and therefore has asked Cullumber National Bank to restructure its $6.05 million note outstanding. The present note has 3 years remaining and pays a current rate of interest of 10%. The present market rate for a loan of this nature is 12%. The note was issued at its face value.

The following are four independent situations. Prepare the journal entry that Larkspur and Cullumber National Bank would make for each of these restructurings. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

(a)		Cullumber National Bank agrees to take an equity interest in Larkspur by accepting common stock valued at $3,756,000 in exchange for relinquishing its claim on this note. The common stock has a par value of $1,757,000.
(b)		Cullumber National Bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book value of $3,181,000 and a fair value of $4,194,000.
(c)		Cullumber National Bank agrees to modify the terms of the note, indicating that Larkspur does not have to pay any interest on the note over the 3-year period.
(d)		Cullumber National Bank agrees to reduce the principal balance due to $5,041,667 and require interest only in the second and third year at a rate of 10%.

Please fill in all the boxes depicted in both images- thank you!

No. Account Titles and Explanation
Debit
Credit
(a)
Larkspur Corporation
Cullumber National Bank
(b) Larkspur Corporation
Cullumber National Bank

(c)
Larkspur Corporation
Cullumber National Bank
(d)
Larkspur Corporation
Cullumber National Bank

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