On December 31, 2017, the Cullumber Bank enters into a debt restructuring agreem

Question

On December 31, 2017, the Cullumber Bank enters into a debt restructuring agreement with Barkley Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $3,300,000 note receivable by the following modifications: 1. Reducing the principal obligation from $3,300,000 to $2,640,000 2. Extending the maturity date from December 31, 2017, to January 1, 2021 3. Reducing the interest rate from 12% to 10%. Barkley pays interest at the end of each year. On January 1, 2021, Barkley Company pays $2,640,000 in cash to Cullumber Bank. Answer the following questions related to Cullumber Bank (creditor). What interest rate should Cullum ber Bank use to calculate the loss on the debt restructuring? (Round answer to 0 decimal places, e.g. 18% Interest rate LINK TO TEXT (1) Compute the loss that Cullumber Bank will suffer from the debt restructuring.(Round answer to O decimal places, e.g. 38,548.) Loss on restructuring of det (2) Prepare the journal entry to record the loss. (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.)

Explanation / Answer

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Cullumber Bank should use 12% historical rate to calculate the loss

Part-1 Loss to Cullumber Bank Pre-structructing carrying amount of Note 3300000 Less: Present Value of re-structured cash flow -Present Value of principal 2640000 due in 3 years at 12% 2640000*0.71178 1879099 -Present Value of interest 264000 annualy for 3 year at 12% 264000*2.401831 634083 2513183 (Interest is 2640000*10%) Loss on Debt Resturcturing 786817

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