Intermediate Accounting
9th Edition
ISBN: 9781259722660
Author: J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher: McGraw-Hill Education
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Chapter 14, Problem 14.35E
Troubled debt restructuring; modification of terms; unknown effective rate
• Appendix B
At January 1, 2018, NCI Industries, Inc., was indebted to First Federal Bank under a $240,000, 10% unsecured note. The note was signed January 1, 2014, and was due December 31, 2019. Annual interest was last paid on December 31, 2016. NCI was experiencing severe financial difficulties and negotiated a restructuring of the terms of the debt agreement. First Federal agreed to reduce last year’s interest and the remaining two years’ interest payments to $11,555 each and delay all payments until December 31, 2019, the maturity date.
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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.
Problem 7:
Colt Company is indebted to Kent Company under an P8,000,000, 10% 4 – year note dated December 31,
2018. The interest of P800,000 was paid on December 31, 2019 and 2020.
During 2021, Colt Company experienced financial difficulties and is likely to default unless concessions are
made. On December 31, 2021 Kent Company agreed to restructuring the debt as follows:
a. Interest of P800,000 for 2021, due December 31, 2021 was made payable December 31, 2022.
b. Interest for 2022 was waived.
c. The principal amount was reduced to P7,000,000.
Required: Prepare the entry record the debt restructuring on the books Colt Company.
____________________________________________________________________
(Term Modification without Gain—Debtor’s Entries) On December 31, 2017, American Bank enters into a debt restructuring agreement with Barkley Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $3,000,000 note receivable by the following modifications:1. Reducing the principal obligation from $3,000,000 to $2,400,000.2. Extending the maturity date from December 31, 2017, to January 1, 2021.3. Reducing the interest rate from 12% to 10%.Barkley pays interest at the end of each year. On January 1, 2021, Barkley Company pays $2,400,000 in cash to American Bank.Instructions(a) Will the gain recorded by Barkley be equal to the loss recorded by American Bank under the debt restructuring?(b) Can Barkley Company record a gain under the term modification mentioned above? Explain.(c) Assuming that the interest rate Barkley should use to compute interest expense in future periods is 1.4276%, prepare the interest payment schedule of the note…
Chapter 14 Solutions
Intermediate Accounting
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