Chapter 14, Problem 15P

1.

To determine

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

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.

$\begin{array}{c}\text{Present value interest =}\text{Face value of bonds}\times \text{Stated interest rate}\times \text{Time period}\\ =\$2,200,000\times 8\%\times \frac{12}{12}\\ =\$176,000\end{array}$

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)
1/2/2016				$2,060,524.84
12/31/2016	$176,000	$206,052.48	$30,052.48	$2,090,577.32
12/31/2017	$176,000	$209,057.73	$33,057.73	$2,123,635.06
12/31/2018	$176,000	$212,363.51	$36,363.51	$2,159,998.56
12/31/2019	$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 31^st December 2019, 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, 2016	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, 2016	Cash	$176,000
	Notes receivable	$30,052.48
	Interest revenue		$206,052.48
	(To record receipt of interest revenue)
December 31, 2017	Cash	$176,000
	Notes receivable	$33,057.73
	Interest revenue		$209,057.73
	(To record receipt of interest revenue)
December 31, 2018	Cash	$176,000
	Notes receivable	$36,363.51
	Interest revenue		$212,363.51
	(To record receipt of interest revenue)
December 31, 2019	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.

To determine

Prepare journal entries to record the debt restructuring agreement and all subsequent interest received 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%.

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.

$\begin{array}{c}\text{Present value interest =}\text{Face value of bonds}\times \text{Stated interest rate}\times \text{Time period}\\ =\$2,200,000\times 1\%\times \frac{12}{12}\\ =\$22,000\end{array}$

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)
1/2/2016				$1,572,365.63
12/31/2016	$22,000	$157,236.56	$135,236.56	$1,707,602.19
12/31/2017	$22,000	$170,760.22	$148,760.22	$1,856,362.41
12/31/2018	$22,000	$185,636.24	$163,636.24	$2,019,998.65
12/31/2019	$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, 2019, 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, 2016	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, 2016	Cash	$22,000
	Notes receivable	$135,236.56
	Interest revenue		$157,236.56
	(To record receipt of interest revenue)
December 31, 2017	Cash	$22,000
	Notes receivable	$148,760.22
	Interest revenue		$170,760.22
	(To record receipt of interest revenue)
December 31, 2018	Cash	$22,000
	Notes receivable	$163,636.24
	Interest revenue		$185,636.24
	(To record receipt of interest revenue)
December 31, 2019	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.

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.

Explanation of Solution

Calculate loss recognized by the creditor.

$\begin{array}{c}\text{Loss recognized by the creditor =}\text{Fair value of stock }-\text{Carrying value of note}\\ \text{=}\left(160,000\text{shares}\times \text{\$14}\text{.50}\right)-\$2,434,031.82\\ =\$2,320,000-\$2,434,031.82\\ =\left(\$114,031.82\right)\end{array}$

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, 2016	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.

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.

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, 2016	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.

$\begin{array}{c}\begin{array}{l}\text{Loss recognized by the }\\ \text{creditor}\text{(transfer of land)}\end{array})\text{=}\text{Fair value of land}-\text{Carrying value of note}\\ \text{=}\$2,300,000-\text{\$2,434,031}\text{.82}\\ =(\$134,031.82)\end{array}$