Stellar Corporation is having financial difficulty and therefore has asked Pearl National Bank to restructure its $6 million note outstanding. The present note has 3 years remaining and pays a current rate of interest of 8%. The present market rate for a loan of this nature is 10%. The note was issued at its face value. The following are four independent situations. Prepare the journal entry that Stellar and Pearl 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 answers to O decimal places, e.g. 58,971. If no entry is required, select "No Entry" for the account titles and enter O for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually. List all debit entries before credit entries.) (a) Pearl National Bank agrees to take an equity interest in Stellar by accepting common stock valued at $3,880,000 in exchange for relinquishing its claim on this note. The common stock has a par value of $1,634,000. (b) Pearl National Bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book value of $3,170,000 and a fair value of $4,029,000. (c) Pearl National Bank agrees to modify the terms of the note, indicating that Stellar does not have to pay any interest on the note over the 3-year period. (d) Pearl National Bank agrees to reduce the principal balance due to $5,172,414 and require interest only in the second and third year at a rate of 8%. Click here to view factor tables. No. Account Titles and Explanation (a) Stellar Corporation Pearl National Bank (b) Stellar Corporation Debit Credit
Stellar Corporation is having financial difficulty and therefore has asked Pearl National Bank to restructure its $6 million note outstanding. The present note has 3 years remaining and pays a current rate of interest of 8%. The present market rate for a loan of this nature is 10%. The note was issued at its face value. The following are four independent situations. Prepare the journal entry that Stellar and Pearl 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 answers to O decimal places, e.g. 58,971. If no entry is required, select "No Entry" for the account titles and enter O for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually. List all debit entries before credit entries.) (a) Pearl National Bank agrees to take an equity interest in Stellar by accepting common stock valued at $3,880,000 in exchange for relinquishing its claim on this note. The common stock has a par value of $1,634,000. (b) Pearl National Bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book value of $3,170,000 and a fair value of $4,029,000. (c) Pearl National Bank agrees to modify the terms of the note, indicating that Stellar does not have to pay any interest on the note over the 3-year period. (d) Pearl National Bank agrees to reduce the principal balance due to $5,172,414 and require interest only in the second and third year at a rate of 8%. Click here to view factor tables. No. Account Titles and Explanation (a) Stellar Corporation Pearl National Bank (b) Stellar Corporation Debit Credit
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Stellar Corporation is having financial difficulty and therefore has asked Pearl National Bank to restructure its $6 million note
outstanding. The present note has 3 years remaining and pays a current rate of interest of 8%. The present market rate for a loan of
this nature is 10%. The note was issued at its face value.
The following are four independent situations. Prepare the journal entry that Stellar and Pearl 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 answers to O decimal places, e.g.
58,971. If no entry is required, select "No Entry" for the account titles and enter O for the amounts. Credit account titles are automatically
indented when the amount is entered. Do not indent manually. List all debit entries before credit entries.)
(a) Pearl National Bank agrees to take an equity interest in Stellar by accepting common stock valued at $3,880,000 in exchange
for relinquishing its claim on this note. The common stock has a par value of $1,634,000.
(b)
Pearl National Bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book value of
$3,170,000 and a fair value of $4,029,000.
(c)
Pearl National Bank agrees to modify the terms of the note, indicating that Stellar does not have to pay any interest on the
note over the 3-year period.
(d)
Pearl National Bank agrees to reduce the principal balance due to $5,172,414 and require interest only in the second and
third year at a rate of 8%.
Click here to view factor tables.
No. Account Titles and Explanation
(a) Stellar Corporation
Pearl National Bank
(b)
Stellar Corporation
Debit
Credit
Transcribed Image Text:(b) Stellar Corporation
Pearl National Bank
(c)
Stellar Corporation
Pearl National Bank
(d)
Stellar Corporation
Pearl National Bank
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Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step 1: Define the concept of notes.
VIEWStep 2: Draft the journal entry for both the companies of equity interest loan is taken.
VIEWStep 3: b. Provide journal entry for land in exchange of note.
VIEWStep 4: c. Draft the entries to record the modified note with no interest.
VIEWStep 5: Provide entry for the new note with reduced principal and interest.
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