On December 31, 2017, the Novak Bank enters into a debt restructuring agreement
ID: 2534823 • Letter: O
Question
On December 31, 2017, the Novak 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, $3,400,000 note receivable by the following modifications:
Barkley pays interest at the end of each year. On January 1, 2021, Barkley Company pays $2,720,000 in cash to Novak Bank. Answer the following questions related to Novak Bank (creditor).
What interest rate should Novak Bank use to calculate the loss on the debt restructuring? (Round answer to 0 decimal places, e.g. 18%.)
%
(1) Compute the loss that Novak Bank will suffer from the debt restructuring. (Round answer to 0 decimal places, e.g. 38,548.)
(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.)
Date
Account Titles and Explanation
Debit
Credit
December 31, 2017
NOVAK BANK
Interest Receipt Schedule After Debt Restructuring
Effective-Interest Rate
Date
Cash
Received
Interest
Revenue
Increase
in Carrying
Amount
Carrying
Amount of
Note
Date
Account Titles and Explanation
Debit
Credit
December 31, 2019
LINK TO TEXT
Date
Account Titles and Explanation
Debit
Credit
December 31, 2021
1. Reducing the principal obligation from $3,400,000 to $2,720,000. 2. Extending the maturity date from December 31, 2017, to January 1, 2021. 3. Reducing the interest rate from 12% to 10%.Explanation / Answer
Novak bank should use historical interest rate of 12% to calculate loss.
The loss is computed in the following manner :
Pre-restructuding carrying amount of note 3400000
Less: present value of restructured future cash flows
Present value of 2720000 at 12% for 3 years (2720000*0.71178) =1936042
Present value of interest of 272000 paid annually at 10% for 3 years (272000*2.40183) 653298
Total present value 2589340
Loss on debt restructuring (3400000-2589340) 810660
Entry :
December 31 2017
Bad debt expense Dr. 810660
Allowance for doubtful accounts Cr. 810660
Interest receipt schedule
Entry
December 31 2019
Cash Dr. 272000
Allowance for doubtful accounts Dr. 43367
Interest revenue cr. 315367
January 1 2021
Cash Dr. 2720000
Allowance for doubtful accounts Dr. 680000
Notes receivable cr. 3400000
Date cash interest interest revenue increase carrying amount carrying amount of note 12/31/2017 2589340 12/31/2018 272000 310721 38721 2628061 12/31/2019 272000 315367 43367 2671428 12/31/2020 272000 320572 48572 2720000 816000 946660 130660Related Questions
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