Tenth National Bank has a $200,000, 12% note receivable from Priday Company that is due on December 31, 2022. On December 31, 2019, Priday misses the interest payment due on that date. The bank expects that the company will also miss the next payment, but will pay the principal on the maturity date. On December 31, 2020, Priday misses the interest payment due on that date. On December 31, 2021, Priday pays half the interest payment due on that date and is not expected to pay the other half.
In early January 2022, the bank and the company agree to a loan restructuring because of the financial condition of the company. The bank forgives the unpaid interest, extends the loan to December 31, 2024, and reduces the interest rate to 6%. The market rate for the loan is estimated to be 10% at this time.
Required:
- 1. Compute the value of the impaired loan on December 31, 2019.
- 2. Prepare the
journal entries from 2019 to 2024 for the bank to record the above events. Assume that Priday makes all required payments under the modified agreement.
1.
Prepare the value of impaired loan on December 31, 2019.
Explanation of Solution
Compute the value of impaired loan as on December 31, 2019.
Particulars | Amount (A) | Present value factor (B) | Present value factor (C) |
Value of the Bonds (A × B × C) | |
Present value of principal | $200,000 | 0.711780 | $142,356.00 | ||
Add: Present value of interest | $24,000 | 1.690051 | 0.892857 | $36,215.37 | |
The value of impaired loan | $178,571.37 |
Table (1)
Note: The Present value of an ordinary annuity of $1 for 3 periods at 12% is 1.690051 (refer Table 4 in TVM Module). And the present value of $1 for 3 periods at 6% is 0.711780, and the present value of $1 for 1 periods at 12% is 0.892857 (refer Table 3 in TVM Module).
Working note:
(1)Calculate present value interest amount.
Therefore, the value of impaired loan amount is $178,571.37.
2.
Prepare journal entries to record 2019 to 2024 for the bank to record the given events, assume Company P makes all required payments under the modified agreement.
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.
Prepare journal entries to record 2019 to 2024 for the bank to record the given events, assume Company P makes all required payments under the modified agreement.
Date | Account titles and Explanation | Debit | Credit |
December 31, 2019 | Interest receivable | $24,000 | |
Interest revenue | $24,000 | ||
(To record adjusting entry to record interest receivable) | |||
December 31, 2019 | Bad debt expense (1) | $45,428.63 | |
Interest receivable | $24,000 | ||
Allowance for doubtful notes | $21,428.63 | ||
(To record adjusting entry to record bad debts expense) | |||
December 31, 2020 | Allowance for doubtful notes (2) | $21,428.63 | |
Interest revenue | $21,428.63 | ||
(To record adjustment entry to record allowance for doubtful notes) | |||
December 31, 2021 | Interest receivable | $24,000 | |
Interest revenue | $24,000 | ||
(To record adjusting entry to record interest receivable) | |||
December 31, 2021 | Bad debt expense (3) | $12,000 | |
Cash | $12,000 | ||
Interest receivable | $24,000 | ||
(To record adjustment entry to record bad debts expense) | |||
January 2, 2022 | Loss on restructured loan (4) | $28,822.03 | |
Notes receivable | $28,822.03 | ||
(To record loss on restructured loan) | |||
December 31, 2022 | Cash | $12,000 | |
Notes receivable | $8,541.36 | ||
Interest revenue (6) | $20,541.36 | ||
(To record bank recognizes interest revenue) | |||
December 31, 2023 | Cash | $12,000 | |
Notes receivable | $9,566.32 | ||
Interest revenue (7) | $21,566.32 | ||
(To record bank recognizes interest revenue) | |||
December 31, 2024 | Cash | $12,000 | |
Notes receivable | $10,714.35 | ||
Interest revenue (8) | $22,714.35 | ||
(To record bank recognizes interest revenue) | |||
December 31, 2024 | Cash | $200,000 | |
Notes receivable | $2,000,000 | ||
(To record cash received for issuing notes receivable) |
Table (2)
Working notes:
(1)Calculate bad debts expense.
(2)Calculate allowance for doubtful notes.
(3)Calculate bad debts expense.
(4)Calculate loss on restructured loan.
(5)Calculate value of restructured loan.
Particulars | Amount (A) | Present value factor (B) | Value of the Bonds (A × B) |
Present value of principal | $200,000 | 0.711780 | $142,356.00 |
Add: Present value of interest ($200,000 × 12%) | $12,000 | 2.401831 | $28,821.97 |
Value of restructured loan | $171,177.97 |
Table (1)
Note: The Present value of an ordinary annuity of $1 for 3 periods at 12% is 2.401831 (refer Table 4 in TVM Module). And the present value of $1 for 3 periods at 12% is 0.711780 (refer Table 3 in TVM Module).
(6)Calculate interest revenue.
(7)Calculate interest revenue.
(8)Calculate interest revenue.
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Chapter 14 Solutions
Intermediate Accounting: Reporting And Analysis
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