Chapter 7, Problem 7.17P

(1)

To determine

Note receivable:

Note receivable refers to a written promise for the amounts to be received within a stipulated period of time. This written promise is issued by a debtor or borrower to lender or creditor. Notes receivable is an asset of a business.

To prepare: Journal entries to record the following transaction.

Explanation of Solution

Journal entries of FL bank are as follows:

FL bank agreed to settle the debt in exchange for land worth $16 million.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
	Land		16,000,000
	Loss on debt restructuring		6,000,000
	Note receivable			20,000,000
	Accrued interest receivable (1)			2,000,000
	(To record the settlement of land for the debt)

Table (1)

Working note:

$\begin{array}{c}\text{Accrued}\text{interest = 10\% of note receivable }\\ \text{=10\%×20,000,000}\\ \text{=2,000,000}\end{array}$ (1)

(2)(a)

To determine

Interest accrued from last year.

Explanation of Solution

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
January 1, 2018	Loss on troubled debt restructuring		8,584,980
	Accrued interest receivable (1)			2,000,000
	Note receivable $\left(\text{\$20,000,000}-\$13,415,020\right)$			6,584,980
	(To record accrued interest)

Table (2)

Working note:

	$	$
Previous value:
Interest Accrued 2017 (1)	2,000,000
Principal	20,000,000
Carrying amount of the receivables		22,000,000
New value:
Interest $\left(\text{\$1,000,000×3}\text{.16987}\right)$	3,169,870
Principal $\left(\text{\$15,000,000×0}\text{.68301}\right)$	10,245,150
Present value of the receivable		(13,415,02)
Loss		8,584,980

Table (3)

• PV factor of 3.16987 (Present value of an ordinary annuity of $1: n = 4, i = 10%) is taken from the table value (Refer Table 4 in Appendix from textbook).
• PV factor of 0.68301 (Present value of $1: n = 4, i = 10%) is taken from the table value (Refer Table 2 in Appendix from textbook).

(b)

To determine

Reduce the interest payment to $1 Million each:

Explanation of Solution

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2018	Cash (required by new agreement)		1,000,000
	Note receivable (Balance)		341,502
	Interest revenue $\left(\text{10\% of \$13,415,020}\right)$			1,341,502
	(To record the interest revenue )

Table (4)

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2019	Cash (required by new agreement)		1,000,000
	Note receivable (Balance)		375,652
	Interest revenue $\left(\text{10\% of \$13,756,522}\right)$			1,375,652
	(To record the interest revenue )

Table (5)

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2020	Cash (required by new agreement)		1,000,000
	Note receivable (Balance)		413,217
	Interest revenue $\left(\text{10\% of \$14,132,174}\right)$			1,413,217
	(To record the interest revenue )

Table (6)

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2021	Cash (required by new agreement)		1,000,000
	Note receivable (Balance)		454,609
	Interest revenue $\left(\text{10\% of \$14,545,391}\right)$			1,454,609
	(To record the interest revenue )

Table (7)

(c)

To determine

Reduce the principal to $15 Million:

Explanation of Solution

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2021	Cash (required by new agreement)		15,000,000
	Note receivable (Balance)			15,000,000
	(To record the principal )

Table (8)

Note:

• $15,000,000 is rounded to amortize the note.

Working note:

Amortization schedule:

Image (1)

(3)

To determine

To defer all payments until the maturity date:

Explanation of Solution

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
January 1, 2018	Loss on troubled debt restructuring		3,029,397
	Accrued interest receivable (1)			2,000,000
	Note receivable $\left(\text{\$20,000,000}-\$18,970,603\right)$			1,029,397
	(To record the loss on debt )
December 31, 2018	Note receivable (Balance)		1,897,060
	Interest revenue $\left(\text{10\% of \$18,970,603}\right)$			1,897,060
	(To record the interest revenue )
December 31, 2019	Note receivable (Balance)		2,086,766
	Interest revenue $\left(\text{10\% of \$18,970,603+1,897,060}\right)$			2,086,766
	(To record the interest revenue )
December 31, 2020	Note receivable (Balance)		2,295,443
	Interest revenue (Refer schedule)			2,295,443
	To record the interest revenue )
December 31, 2021	Note receivable (Balance)		2,295,443
	Interest revenue (Refer schedule)			2,295,443
	To record the interest revenue )
December 31, 2021	Cash (required by new agreement)		27,775,000
	Note receivable (Balance)			27,775,000
	(To record the principal )

Table (8)

Working notes:

	$
Previous value:
Interest Accrued 2017 (1)	2,000,000
Principal	20,000,000
Carrying amount of the receivables
New value:
Principal $\left(\text{\$27,775,000×0}\text{.68301}\right)$	18,970,603
Loss	3,029,397

Table (9)

• PV factor of 0.68301 (Present value of $1: n = 4, i = 10%) is taken from the table value (Refer Table 2 in Appendix from textbook).

Amortization schedule:

Image (2)