On December 31, 2017, American Bank enters into a debt restructuring agreement w
ID: 2409808 • Letter: O
Question
On December 31, 2017, American Bank enters into a debt restructuring agreement with Monty Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $2,600,000 note receivable by the following modifications:
Monty pays interest at the end of each year. On January 1, 2021, Monty Company pays $2,080,000 in cash to American Bank.
Will the gain recorded by Monty be equal to the loss recorded by American Bank under the debt restructuring?
Can Monty Company record a gain under the term modification mentioned above?
Assuming that the interest rate Monty should use to compute interest expense in future periods is 1.4276%, prepare the interest payment schedule of the note for Monty Company after the debt restructuring. (Round answers to 0 decimal places, e.g. 38,548.)
Prepare the interest payment entry for Monty Company on December 31, 2019. (Round answers to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)
Date
Account Titles and Explanation
Debit
Credit
December 31, 2019
What entry should Monty make on January 1, 2021? (Round answers to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)
Date
Account Titles and Explanation
Debit
Credit
December 31, 2021
1. Reducing the principal obligation from $2,600,000 to $2,080,000. 2. Extending the maturity date from December 31, 2017, to January 1, 2021. 3. Reducing the interest rate from 12% to 10%.Explanation / Answer
Part A
No. The gain recorded by Monty company is not equal to the loss recorded by American Bank under the debt restructuring agreement. In response to this "accounting assymmetry" treatment, GAAP did not address debtor accounting because the FASB was concerned that expansion of the scope of its pronouncement would delay issuance of GAAP for the creditor.
Part B
No. There is no gain under the modified terms because the total future cash flows after restructuring exceed the total pre-restructuring carrying of the note (principal).
Total future cash flows after restructuring are:
Principal....................................................... $2,080,000
Interest ($2,080,000 * 10% * 3).....................624,000
Total................................................................$2,704,000
Total pre-restructuring carrying amount of note (principal)... 2,600,000
Part C
Monty company
Interest payment schedule after debt-restructuring
Effective interest rate of 1.4276%
208000
(2080000*10%)
37118
(2600000*1.4276%)
170882
(208000-37118)
2429118
(2600000-170882)
34678
(2429118*1.4276%)
173322
(208000-34678)
2255794
(2429116-173322)
32206
(208000-32206)
175794
(2255794-2080000)
Part D
Part E
Date cash paid 10% interest payment 1.4276% reduction of carrying amount carrying amount of note 12/31/2017 2600000 12/31/2018208000
(2080000*10%)
37118
(2600000*1.4276%)
170882
(208000-37118)
2429118
(2600000-170882)
12/31/2019 20800034678
(2429118*1.4276%)
173322
(208000-34678)
2255794
(2429116-173322)
12/31/2020 20800032206
(208000-32206)
175794
(2255794-2080000)
2080000 Total 624000 104002 519998Related Questions
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