Debt Restructuring Sectron Co. has a note payable of $480,000 with a 10 percent

Question

Debt Restructuring

Sectron Co. has a note payable of $480,000 with a 10 percent interest rate due to Prime First Trust on january 1, 2005. Sectron Co. recently experienced financial hardship due to slow sales in the appliance industry. Sectron restructured the note with Prime First Trust, reducing the principal to $400,000, and interest rate to 8 percent, in addition to extending the maturity by three years.

1. Calculate the gain, or loss to Prime First Trust and Sectron CO., if any from restructuring the note. If Sectron does not gain from the restructuring, calculate the effective interest rate after the restructuring.

2. Prepare a schedule of interest and amortizaation for Prime First Trust and Sectron Co. after the restructuring.

3. Prepare the ournal entries Prime First Trust and Sectron Co. would make related to the restructuring for the following.

a. The restructuring agreement.

b. Interest payments for the first, second, and third year after the restructuring.

c. Repayment of principal.

4. Repeat #1-#3, assuming the interst rate was reduced to 6 percent after the restructuring.

**** Please show all work and calculations so I can follow along and learn***

Thanks!

Explanation / Answer

1 Gain to Sectron Co: a) Saving in principal amount: $480,000 less $400,000 = $80,000 b) Saving in interest: $480,000* 10% = $48,000 $400,000*8% = $32,000 $16,000 Above gain to Sectron Co. is loss for Prime First Trust. Interest orginally payable: $480,000* 10% = $48,000 If Sectron Co. does not gain from restucturing, then effective interest is: $48,000/$400,000 = 12% 2 Assuming principal amount is repayable at the end of the third year, interest payable for each year is: $400,000*8% = $32,000 3 Journal Entries: Payment of interest at the end of each year: Interest expense Dr. $32,000 To Cash/Bank Cr. $32,000 Repayment of principal at the end of third year: Note Payable Dr. $400,000 To Cash/Bank Cr. $400,000 4 Gain to Sectron Co: a) Saving in principal amount: $480,000 less $400,000 = $80,000 b) Saving in interest: $480,000* 10% = $48,000 $400,000*6% = $24,000 $24,000 Above gain to Sectron Co. is loss for Prime First Trust. c) Interest orginally payable: $480,000* 10% = $48,000 If Sectron Co. does not gain from restucturing, then effective interest is: $48,000/$400,000 = 12% Assuming principal amount is repayable at the end of the third year, interest payable for each year is: $400,000*6% = $24,000 Journal Entries: Payment of interest at the end of each year: Interest expense Dr. $24,000 To Cash/Bank Cr. $24,000 Repayment of principal at the end of third year: Note Payable Dr. $400,000 To Cash/Bank Cr. $400,000

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