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1.
Troubled debt restructuring
When the unique terms of a debt agreement is encouraged by the financial complications by the debtor (borrower), the new agreement is referred to as a troubled debt restructuring. It includes some allowances on the part of the creditors (issuer).
To Prepare: The
1.
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Explanation of Solution
Prepare journal entry for gain on disposal of land.
Date | Account Title and Explanation | Debit ($) | Credit ($) | |||
Land | 3,000,000 | |||||
Gain on Disposal of Assets | 3,000,000 | |||||
(To record gain on disposition of assets) |
Table (1)
Working notes:
Calculate the amount of gain on disposition.
Hence, gain on disposal of assets amount is $3,000,000.
- Land is a non – current asset, and it is increased. Therefore, debit land account for $3,000,000.
- Gain on disposal of asset is a component of
stockholders’ equity , and it is increased. Therefore, credit gain on disposal of asset amount is $3,000,000.
Date | Account Title and Explanation | Debit ($) | Credit ($) | |
Notes Payable | 20,000,000 | |||
Interest Payable (2) | 2,000,000 | |||
Gain on Troubled Debt Restructuring (3) | 6,000,000 | |||
Land | 16,000,000 | |||
(To record restructuring of the debt) |
Table (2)
Working notes:
Calculate the amount of interest payable.
Hence, interest payable amount is $2,000,000.
(2)
Calculate the amount of gain on troubled debt restructuring.
Hence, gain on troubled debt restructuring amount is $6,000,000.
(3)
- Notes payable is a long term liability, and it is decreased. Therefore, debit notes payable account for $20,000,000.
- Interest payable is a current liability, and it is decreased. Therefore, debit interest payable account for $2,000,000.
- Gain on troubled debt restructuring is a component of stockholders’ equity, and it is increased. Therefore, credit gain on troubled debt restructuring account for $6,000,000.
- Land is a non – current asset, and it is decreased. Therefore, credit land account for $16,000,000.
(2)(a)
To Prepare: The journal entries to record forgive the interest accrued from last year.
(2)(a)
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Explanation of Solution
Prepare the journal entry to record forgive the interest accrued from last year of Bank FL.
Date | Account Title and Explanation | Debit ($) | Credit ($) | |||
2016 | Notes Payable | 1,000,000 | ||||
January | 1 | |||||
Interest Payable (4) | 2,000,000 | |||||
Gain on Debt Restructuring (5) | 3,000,000 | |||||
(To record restructuring of the debt) |
Table (3)
Working notes:
Calculate the amount of interest payable.
Hence, interest payable amount is $2,000,000.
(4)
Calculate the amount of gain on troubled debt restructuring.
Hence, gain on debt restructuring amount is $3,000,000.
(5)
- Notes payable is a long term liability, and it is decreased. Therefore, debit notes payable account for $2,000,000.
- Interest payable is a current liability, and it is decreased. Therefore, interest payable account for $2,000,000.
- Gain on debt restructuring is a component of stockholders’ equity, and it is increased. Therefore, credit gain on debt restructuring account for $3,000,000.
2 (b)
To Prepare: The journal entry to revise interest payment on December 31, 2018, 2019, 2020 and 2021.
2 (b)
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Explanation of Solution
Prepare the journal entry to record revise interest payment on December 31, 2016, 2017, 2018 and 2019.
Date | Account Title and Explanation | Debit ($) | Credit ($) |
Notes Payable | 1,000,000 | ||
Cash | 1,000,000 | ||
(To record restructuring of the debt to revise interest payment) |
Table (4)
- Notes payable is a long term liabilities, and it is decreased. Therefore, debit notes payable account for $1,000,000.
- Cash is a current asset, and it is decreased. Therefore, credit cash account for $1,000,000.
2 (c)
To Prepare: The journal entry to revise principal payment.
2 (c)
![Check Mark](/static/check-mark.png)
Explanation of Solution
Prepare the journal entry to revise the principal payment as on 31st December 2019.
Date | Account Title and Explanation | Debit ($) | Credit ($) | |
2019 | Notes Payable(L–) | 15,000,000 | ||
December | 31 | |||
Cash (A–) | 15,000,000 | |||
(To record restructuring of the debt to revise principal payment) |
Table (5)
- Notes payable is a long term liability, and it is decreased. Therefore, debit notes payable account for $15,000,000.
- Cash is a current asset, and it is decreased. Therefore, credit cash account for $15,000,000.
(3)
To Prepare: The journal entry to record the restructuring of the debt at January 1, 2016.
(3)
![Check Mark](/static/check-mark.png)
Explanation of Solution
The future payment of debt $27,775,000 is more than the present value of debt $22,000,000
Working note:
Figure (1)
The following is journal entry for restructuring of the debt at December 31, 2016:
Date | Account Title and Explanation | Debit ($) | Credit ($) | |||
2016 | Interest Expense |
1,320,000 | ||||
December | 31 | |||||
Interest Payable | 1,320,000 | |||||
(To record interest expense) |
Table (6)
Working notes:
Calculate the present value factor.
Hence, present value factor is 0.79208.
Find the interest rate from Table 2 (present value $1) in Appendix.
In row 4 of Table 2, the value of 0.79208 is in 6% column.
Hence, the effective rate of interest is 6%.
Calculate the amount of interest expense.
Hence, interest expense amount is $1,320,000.
- Interest expense is a component of stockholders’ equity, and it is decreased. Therefore, debit interest expense account for $1,320,000.
- Interest payable is a current liability, and it is increased. Therefore, credit interest payable account for $1,320,000.
The following is journal entry for restructuring of the debt at December 31, 2017:
Date | Account Title and Explanation | Debit ($) | Credit ($) | |||
2017 | Interest Expense | 1,399,200 | ||||
December | 31 | |||||
Interest Payable | 1,399,200 | |||||
(To record interest expense) |
Table (7)
- Interest expense is a component of stockholders’ equity, and it is decreased. Therefore, debit interest expense account for $1,399,200.
- Interest payable is a current liability, and it is increased. Therefore, credit interest payable account for $1,399,200.
The following is journal entry for restructuring of the debt at December 31, 2018:
Date | Account Title and Explanation | Debit ($) | Credit ($) | |||
2018 | Interest Expense | 1,483,152 | ||||
December | 31 | |||||
Interest Payable | 1,483,152 | |||||
(To record interest expense) |
Table (8)
- Interest expense is a component of stockholders’ equity, and it is decreased. Therefore, debit interest expense account for $1,483,152.
- Interest payable is a current liability, and it is increased. Therefore, credit interest payable account for $1,483,152.
The following is journal entry for restructuring of the debt at December 31, 2019:
Date | Account Title and Explanation | Debit ($) | Credit ($) | |||
2019 | Interest Expense | 1,572,648 | ||||
December | 31 | |||||
Interest Payable | 1,572,648 | |||||
(To record interest expense) |
Table (9)
- Interest expense is a component of stockholders’ equity, and it is decreased. Therefore, debit interest expense account for $1,572,648.
- Interest payable is a current liability, and it is increased. Therefore, credit interest payable account for $1,572,648.
The following is journal entry for restructuring of the debt at December 31, 2019:
Date | Account Title and Explanation | Debit ($) | Credit ($) | |||
2019 | Notes Payable (L–) |
20,000,000 | ||||
December | 31 | |||||
Interest Payable (6) | 7,775,000 | |||||
Cash (A–) | 27,775,000 | |||||
(To record restructuring of the debt to revise interest amount) |
Table (9)
Working note:
Calculate the amount of interest payable.
Hence, interest payable amount is $7,775,000.
(6)
- Notes payable is a long term liability, and it is decreased. Therefore, debit notes payable account for $2,000,000.
- Interest payable is a current liability, and it is decreased. Therefore, interest payable account for $7,775,000.
- Cash is a current asset, and it is decreased. Therefore, credit cash account for $27,775,000.
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