Exercise 14-23 (this question has 5 different parts to it) On December 31, 2014,

Question

Exercise 14-23 (this question has 5 different parts to it)

On December 31, 2014, the American Bank enters into a debt restructuring agreement with Barkley Company, which is now experiencing financial trouble. The bank agrees to restructure a 11%, issued at par, $3,119,000 note receivable by the following modifications:

1. What interest rate should American Bank use to calculate the loss on the debt restructuring?

interest rate= ?

2a.Compute the loss that American Bank will suffer from the debt restructuring, loss on restructing of debt?

Loss on restructing of debt= ?

2b. Prepare the journal entry to record the loss.

3. Prepare the interest receipt schedule for American Bank after the debt restructuring.

4. Prepare the interest receipt entry for American Bank on December 31, 2016.

5. What entry should American Bank make on January 1, 2018?

A. Reducing the principal obligation from $3,119,000 to $2,495,200. B. Extending the maturity date from December 31, 2014, to January 1, 2018. C. Reducing the interest rate from 11% to 9%.

Explanation / Answer

Solution:

(1) . Interest Caluculation:

   American Bank Interest rate Restructure on 11%

(2). Journal Entry for Record the Loss:

   Cash 2,24,568

   Loss on 2,24,568

(3). Prepare the interest receipt schedule:

(4) . Journal Entry for Interest Received:

Americal Bank 2,24,568   

Interest Received 2,24,568

Date Cash Received Interest Revenue Increase in Carrying Amount Carrying Amount of Note 12/31/14 31,19,000 3,43,090 34,62,090 34,62,090 12/31/15 34,62,090 3,80,830 38,42,920 38,42,920 12/31/16 38,42,920 3,84,292 42,27,212 42,27,212 12/31/17 42,27,212 3,80,449 46,07,661 46,07,661 Total 14,651,222 14,88,661 16,139,883
16,139,883

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