Sandro Corporation is having financial difficulty and therefore has asked Bottic

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

Notes payables$3,000,000

To Land$2,400,000

ToUnrealized gain$600,000

Notes Payable$3,000,000

Interest Expenses$375,000

To Notes Payable$3,375,000

Notes payable @10%                                 $3,000,000

            To           Notes payable @5%                                       $2,500,000

            To           Unrealized Gain                                                                $500,000

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