Sandro Corporation is having financial difficulty and therefore has asked Bottic
ID: 2462949 • Letter: S
Question
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
(a) On the books of Sandro:
Particulars
Dr. (Amount in $)
Cr. (Amount in $)
Notes Payable
3,000,000
Land
1,950,000
Gain on Disposition of Real Estate
450,000
Gain on Restructuring of Debt
600,000
Calculation 1
Fair value of land $2,400,000
Book value of land 1,950,000
Gain on disposition of
real estate $ 450,000
Calculation 2
Note payable (carrying amount) $3,000,000
Fair value of land 2,400,000
Gain on restructuring of debt $ 600,000
On the books of Botticelli National Bank:
Particulars
Dr. (Amount in $)
Cr. (Amount in $)
Investment in Land
2,400,000
Allowance for Doubtful Accounts (or Bad
Debt Expense)
600,000
Notes Receivable
3,000,000
(c) On the books of Sandro:
No entry needed because aggregate cash flows equal the carrying amount.
Aggregate cash flows
Principal $2,500,000
Interest ($2,500,000X10%X2) 500,000
$3,000,000
Carrying Amount $3,000,000
Particulars
Dr. (Amount in $)
Cr. (Amount in $)
Notes Payable
3,000,000
Land
1,950,000
Gain on Disposition of Real Estate
450,000
Gain on Restructuring of Debt
600,000
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