2. Sandro Corporation is having financial difficulty and therefore has asked Bot
ID: 2461884 • Letter: 2
Question
2. Sandro Corporation is having financial difficulty and therefore has asked Botticelli National Bank to restructure its $3 million note outstanding. The present note has 3 years remaining and pays a current rate of interest of 10% annually. The note was originally issued at its face value (i.e., no discount). Sandro has made all required interest payments to date.
REQUIRED:
Presented below are three independent situations. Prepare the journal entries that Sandro would make to record these restructurings from the date of restructuring through final settlement:
(a) On January 1, 2013, Botticelli National Bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book value of $1,950,000 and a fair value of $2,400,000.
(b) On January 1, 2013, Botticelli National Bank agrees to modify the terms of the note, indicating that Sandro does not have to pay any interest on the note over the 3-year period and that it will accept one lump sum payment of $3,375,000 three years from today to settle the note.
(c) On January 1, 2013, Botticelli National Bank agrees to reduce the principal balance due to $2,500,000 and to reduce the interest rate to 5% annually, payable at the end of each year.
Explanation / Answer
Date
Account title & Explanations
Debit
Credit
Jan 1,
2013
Note payable to B national bank
$ 3,000,000
Gain on restructuring of debt (3000,000-1950,000)
$ 1,050,000
Real estates
$ 1,950,000
b)
Date
Account title & Explanations
Debit
Credit
Dec 31,
2015
Note payable to B national bank
$ 3,375,000
cash
$ 3,375,000
Date
Account title & Explanations
Debit
Credit
Jan 1,
2013
Note payable to B national bank
$ 3,000,000
Gain on restructuring of debt (3000,000-1950,000)
$ 1,050,000
Real estates
$ 1,950,000
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