On December 31, 2017, American Bank enters into a debt restructuring agreement w

Question

On December 31, 2017, American Bank enters into a debt restructuring agreement with Windsor Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $2,700,000 note receivable by the following modifications:

Windsor pays interest at the end of each year. On January 1, 2021, Windsor Company pays $1,790,000 in cash to American Bank.

Part 1:

What interest rate should Windsor use to compute its interest expense in future periods? (Round answer to 0 decimal places, e.g. 18%.)

%

Part 2:

I will post another question for Part 3

Link to Part 3 question:

https://www.chegg.com/homework-help/questions-and-answers/december-31-2017-american-bank-enters-debt-restructuring-agreement-windsor-company-experie-q30347221

1. Reducing the principal obligation from $2,700,000 to $1,790,000. 2. Extending the maturity date from December 31, 2017, to January 1, 2021. 3. Reducing the interest rate from 12% to 10%.

Explanation / Answer

1) Windsor company should use 10% interest expense in future periods The gain is computed as follows : Pre-structuring carrying amount of note 2700000 Less : Present value of restructured future cash flows: Present value of principal $1790000 due in 3 yrs at 12% 1274087 Present value of Interest $179000 paid annually for 3 yrs at 12% 429927.8 1704014 Gain on restructuring 995985.6 2) Windsor Company Interest payment schedule After Debt restructing Effective-Interest Rate Date Cash Paid Interest Expense Reduction of carrying amount Carrying amount of note 12/31/2017 1704014 12/31/2018 179000 204481.7 25481.68 1678532 12/31/2019 179000 201423.9 22423.88 1656108 12/31/2020 179000 198733 19733.01 1636375 Total 537000 604638.6 67638.57

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