Troubled Debt Restructuring Wolfconn Company is having financial difficulties. It has a note payable with a principal amount of $5,000,000, due in three years, plus accrued interest of $750,000 that has not been paid. Wolfconn and the holder of the note negotiate a restructuring of the note, with the following terms: • Principal amount is $2,500,000, payable in five years. • Interest on the note is payable at the end of each of the five years, at a rate of 8 percent per annum. Required a. Prepare the entry to record the restructuring of the debt. Description Debit Answer Answer Credit Answer Answer b. Suppose the new note had a principal amount of $4,500,000, payable in five years, with interest at 8 percent payable at the end of each of the five years. How would this restructuring be recorded? Answer

Troubled Debt Restructuring Wolfconn Company is having financial difficulties. It has a note payable with a principal amount of $5,000,000, due in three years, plus accrued interest of $750,000 that has not been paid. Wolfconn and the holder of the note negotiate a restructuring of the note, with the following terms: • Principal amount is $2,500,000, payable in five years. • Interest on the note is payable at the end of each of the five years, at a rate of 8 percent per annum. Required a. Prepare the entry to record the restructuring of the debt. Description Debit Answer Answer Credit Answer Answer b. Suppose the new note had a principal amount of $4,500,000, payable in five years, with interest at 8 percent payable at the end of each of the five years. How would this restructuring be recorded? Answer

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter7: Financial Activities

Section: Chapter Questions

Problem 7QE

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Long-Term Debt and Ethics You arc the CFO of Diversified Industries. Diversified has suffered through 4 or 5 tough years. This has deteriorated its financial condition to the point that Diversified is in danger of violating two loan covenants related to its largest loan, which is not due for 12 more years. The loan contract states that if Diversified violates any of these covenants, the loan principal becomes immediately due and payable. Diversified would be unable to make this payment, and any additional loans taken to repay this loan would likely be at higher rates, forcing Diversified into bankruptcy. An investment banker suggests forming another entity (called special purpose entities or SPE) and transferring some debt to this SPE. Structuring the SPE very carefully will have the effect of moving enough debt off Diversifier's balance sheet to keep the company in compliance with all its loan covenants. The investment banker assures you that accounting rules permit such accounting treatment. Required: How do you react to the investment banker?
Income, Cash Flow, and Future Losses On January L 2017, Cermack National Bank loaned 55,000,000 under a 2-year, zero coupon note to a real estate developer. The bank recognized interest revenue on this note of approximately $400,000 per year. Due to an economic downturn, the developer was unable to pay the $5,800,000 maturity amount on December 31, 2018. The bank convinced the developer to pay $800,000 on December 31, 2018, and agreed to extend $5,000,000 credit to the developer despite the gloomy economic outlook for the next several years. Thus, on December 31, 2018, the bank issued a new 2-year, zero coupon note to the developer to mature on December 31, 2020, for $6,000,000. The bank recognized interest revenue on this note of approximately $500,000 per year. The banks external auditor insisted that the riskiness of the new loan be recognized by increasing the allowance for uncollectible notes by $1,500,000 on December 31, 2018, and $2,000,000 on December 31, 2019. On December 31, 20201 the bank received $1,200,000 from the developer and learned that the developer was in bankruptcy and that no additional amounts would be recovered. Required: Prepare a schedule showing the effect of the notes on net income in each of the 4 years.
Income, Cash Flow, and Future Losses On January L 2017, Cermack National Bank loaned 55,000,000 under a 2-year, zero coupon note to a real estate developer. The bank recognized interest revenue on this note of approximately $400,000 per year. Due to an economic downturn, the developer was unable to pay the $5,800,000 maturity amount on December 31, 2018. The bank convinced the developer to pay $800,000 on December 31, 2018, and agreed to extend $5,000,000 credit to the developer despite the gloomy economic outlook for the next several years. Thus, on December 31, 2018, the bank issued a new 2-year, zero coupon note to the developer to mature on December 31, 2020, for $6,000,000. The bank recognized interest revenue on this note of approximately $500,000 per year. The banks external auditor insisted that the riskiness of the new loan be recognized by increasing the allowance for uncollectible notes by $1,500,000 on December 31, 2018, and $2,000,000 on December 31, 2019. On December 31, 20201 the bank received $1,200,000 from the developer and learned that the developer was in bankruptcy and that no additional amounts would be recovered. Required: 1. Prepare a schedule showing annual cash flows fur the two notes in each of the 4 years.
Income, Cash Flow, and Future Losses On January L 2017, Cermack National Bank loaned 55,000,000 under a 2-year, zero coupon note to a real estate developer. The bank recognized interest revenue on this note of approximately $400,000 per year. Due to an economic downturn, the developer was unable to pay the $5,800,000 maturity amount on December 31, 2018. The bank convinced the developer to pay $800,000 on December 31, 2018, and agreed to extend $5,000,000 credit to the developer despite the gloomy economic outlook for the next several years. Thus, on December 31, 2018, the bank issued a new 2-year, zero coupon note to the developer to mature on December 31, 2020, for $6,000,000. The bank recognized interest revenue on this note of approximately $500,000 per year. The banks external auditor insisted that the riskiness of the new loan be recognized by increasing the allowance for uncollectible notes by $1,500,000 on December 31, 2018, and $2,000,000 on December 31, 2019. On December 31, 20201 the bank received $1,200,000 from the developer and learned that the developer was in bankruptcy and that no additional amounts would be recovered. Required: Which figure, net income or net cash flow, does the better job of telling the banks stock-holders about the effect of these notes on the bank? Explain by reference to the schedules prepared in Requirements 1 and 2.
CHALLENGE PROBLEM This problem challenges you to apply your cumulative accounting knowledge to move a step beyond the material in the chapter. On April 1, 20-1, Rebound Co. issued 300,000 of 10%, 10-year bonds, callable at 105 after three years, at face value. On April 1, 20-4, after completing three years of interest payments on the bonds, Rebound is considering calling the bonds and issuing 300,000 of new 8%, 10-year bonds at face value. The current market interest rate is only 8%, so Rebound thinks it might save money by taking this action. REQUIRED 1. Compute the net savings to Rebound over the life of the original bond issue if it calls the old bonds and issues the new bonds. 2. Assuming Rebound calls the original bond issue, prepare the journal entry for the bond redemption.
On September 30, Franz Corporation notices a decline in value of its investment in held-to-maturity bonds. On that date, the carrying value of the bonds is 38,500 and the fair value is 22,980. Franz evaluation of this investment reveals that expected credit losses are 10,000. Prepare the journal entry to record the impairment.
Marmol Corporation uses the allowance method for bad debts. During 2019, Marmol charged 50,000 to bad debt expense and wrote off 45,200 of uncollectible accounts receivable. These transactions resulted in a decrease in working capital of: a. 0 b. 4,800 c. 45,200 d. 50,000
DEBT RESTRUCTURING On January 1, 2022, ACT company borrowed funds from DEF Finance by issuing a promissory note for P1,500,000. Due to the economic downtrend in the industry of ACT Company, the company experienced low sales and therefore cannot meet its obligation in 2024. On December 31, 2024, which is the maturity date of the obligation, DEF finance accepted the offer of ACT Company’s building with a cost of P 2,500,000 and accumulated depreciation balance on this date of P 750,000 in full settlement of the note and annual accrued interest at 12%. Interest is payable annually and the building has a fair value on the date of restructuring of P 1,600,000. Provide the journal entries for each problems and assumptions.
Due to extreme financial difficulties, an entity negotiated a restructuring of 10%, P5,000,000 note payable due on December 31, 2X18. The unpaid interest on the note on such date is P500,000. The creditor agreed to reduce the face amount to P4,000,000, forgive the unpaid interest, reduce the interest rate to 8%, and extend the due date three (3) years from December 31, 2X18. The present value of 1 at 10% for three (3) periods is 0.75 and the present value of an ordinary annuity of 1 at 10% for three (3) periods is 2.49. Using the given information, answers the following items: What is the discount or premium on the new note payable on December 31, 2X18? What amount should be reported as interest expense for 2X19? What is the carrying amount of note payable on December 31, 2X19?
Due to extreme financial difficulties, Armada Company has negotiated a restructuring of its 10% P5,000,000 note payable due on December 31, 2021. the unpaid interest on the note on such date is P500,000. the creditor has agreed to reduce the face value to P4,000,000, forgive the unpaid interest, reduce the interest rate to 8% and extend the due date three years from December 31, 2021. Armada Company should report gain on extinguishment of debt in its 2021 income statement at Group of answer choices 1,203,200 1,703,200 540,000 2,000000
ABC Company, due to extreme financial difficulties has negotiated a restructuring of its 10%, P10,000,000 note payable due on December 31, 2021. The unpaid interest on the note on such date is P1,000,000. The creditor has agreed to reduce the face value to P8,000,000, forgive the unpaid interest, reduce interest rate to 8% and extend the due date three years from December 31, 2021. The present value of 1 at 10% for three periods is 0.75 and present value of an ordinary annuity of 1 at 10% for three periods is 2.49. What is the gain on extinguishment of debt to be recognized by ABC Company on December 21, 2021?
ABC Company, due to extreme financial difficulties has negotiated a restructuring of its 10%, P10,000,000 note payable due on December 31, 2021. The unpaid interest on the note on such date is P1,000,000. The creditor has agreed to reduce the face value to P8,000,000, forgive the unpaid interest, reduce interest rate to 8% and extend the due date three years from December 31, 2021. The present value of 1 at 10% for three periods is 0.75 and present value of an ordinary annuity of 1 at 10% for three periods is 2.49. What is the interest expense to be recognized by ABC Company for the year 2022?