Concept explainers
(1)
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:
(1)
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 ($) |
Land | 16,000,000 | |||
Loss on debt restructuring | 6,000,000 | |||
Note receivable | 20,000,000 | |||
Accrued interest receivable (1) | 2,000,000 | |||
(To record the settlement of land for the debt) |
Table (1)
Working note:
(2)(a)
Interest accrued from last year.
(2)(a)
Explanation of Solution
Date | Accounts title and explanation | Post Ref. | Debit ($) |
Credit ($) |
January 1, 2018 | Loss on troubled debt restructuring | 8,584,980 | ||
Accrued interest receivable (1) | 2,000,000 | |||
Note receivable
|
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
|
3,169,870 | |
Principal
|
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)
Reduce the interest payment to $1 Million each:
(b)
Explanation of Solution
Date | Accounts title and explanation | Post Ref. | Debit ($) |
Credit ($) |
December 31, 2018 | Cash (required by new agreement) | 1,000,000 | ||
Note receivable (Balance) | 341,502 | |||
Interest revenue
|
1,341,502 | |||
(To record the interest revenue ) |
Table (4)
Date | Accounts title and explanation | Post Ref. | Debit ($) |
Credit ($) |
December 31, 2019 | Cash (required by new agreement) | 1,000,000 | ||
Note receivable (Balance) | 375,652 | |||
Interest revenue
|
1,375,652 | |||
(To record the interest revenue ) |
Table (5)
Date | Accounts title and explanation | Post Ref. | Debit ($) |
Credit ($) |
December 31, 2020 | Cash (required by new agreement) | 1,000,000 | ||
Note receivable (Balance) | 413,217 | |||
Interest revenue
|
1,413,217 | |||
(To record the interest revenue ) |
Table (6)
Date | Accounts title and explanation | Post Ref. | Debit ($) |
Credit ($) |
December 31, 2021 | Cash (required by new agreement) | 1,000,000 | ||
Note receivable (Balance) | 454,609 | |||
Interest revenue
|
1,454,609 | |||
(To record the interest revenue ) |
Table (7)
(c)
Reduce the principal to $15 Million:
(c)
Explanation of Solution
Date | Accounts title and explanation | Post Ref. | Debit ($) |
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:
- $15,000,000 is rounded to amortize the note.
Working note:
Amortization schedule:
Image (1)
(3)
To defer all payments until the maturity date:
(3)
Explanation of Solution
Date | Accounts title and explanation | Post Ref. | Debit ($) |
Credit ($) |
January 1, 2018 | Loss on troubled debt restructuring | 3,029,397 | ||
Accrued interest receivable (1) | 2,000,000 | |||
Note receivable
|
1,029,397 | |||
(To record the loss on debt ) | ||||
December 31, 2018 | Note receivable (Balance) | 1,897,060 | ||
Interest revenue
|
1,897,060 | |||
(To record the interest revenue ) | ||||
December 31, 2019 | Note receivable (Balance) | 2,086,766 | ||
Interest revenue
|
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
|
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)
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