Entries to record restructuring of debt. Rose Corporation was unable to service
ID: 2545034 • Letter: E
Question
Entries to record restructuring of debt. Rose Corporation was unable to service its outstanding debts. The company is considered to be experiencing significant financial difficulties. In an attempt to avoid filing for bankruptcy, it took the following measures:
a) Patents with book value of $140,000 and accumulated amortization of $115,000 were sold for $20,000.
b) Goodwill with a book value of $150,000 resulted from the acquisition of a small manufacturing firm in Indiana. The goodwill was tested for impairment, and it was concluded that $100,000 of the goodwill was impaired.
c) A mortgage on a parcel of vacant land had a book value of $230,000. The land with a book value of $210,000 was sold for net proceeds of $185,000 after payment of $10,000 of Transaction costs. The mortgage holder accepted the proceeds in full settlement of the mortgage and related accrued interest of $15,000.
d) A loan from a major shareholder/employee had a remaining principal amount of $150,000 plus accrued interest of $4,500 based on the state rate of 12% payable quarterly. Given significantly lower current market rates, the shareholder agreed to restructure the debt as follows: 6% interest, 16 quarterly payments of principal and interest in the amount of $8,810.25, and receipt of a cash bonus of $30,000 in satisfaction of any remaining debt.
e) A major vendor had a payable balance of $85,000, which had remained unpaid for over five months. In satisfaction of the payable, the vendor agreed to receive an immediate cash payment of $15,000 plus six monthly payments of $10,000 each.
f) Bank debt with an outstanding balance of $532,000 including accrued interest of $22,000 was reduced by $80,000 in exchange for investment securities that were recorded at their market value of $62,000. Another $200,000 of debt was exchanged for treasury stock of the company that had a par value of $50,000 and an original cost of $150,000. The balance of debt was restructured calling for 10 quarterly payments of $27,470.38. The original bank debt had a stated interest of 8%.
g) A bank note payable with a balance of $60,000 was restructured by making three quarterly payments of $17,000.
h) A partially secured creditor with a debt balance of $120,000 repossessed equipment that served as collateral. The equipment had a book value of $220,000 and accumulated depreciation of $150,000. The remaining $40,000 of debt was to be paid over the next six quarters in equal payments bearing interest at 5.6%, compared to the original rate of 6.4%.
Required: Prepare all of the necessary entries to record the above events (a) through (h). Determine the total amount of interest expense to be recognized in connection with the first quarterly payment associated with the restructured debts.
Explanation / Answer
Account Title Debit Credit a. Cash 20000 Accumulated amortisation-Patents 115000 Loss on sale of patents 120000 Patents 255000 b.Impairment loss 50000 Goodwill 50000 c.Cash 185000 Transaction costs 10000 Loss on sale of land 15000 Land 210000 Mortgage payable 230000 Interest on mortgage 15000 Cash 185000 Gain on early retirement 60000 d. Loan payable 150000 Interest payable 4500 Bonus to shareholder 30000 Restructured Loan from Shareholder 124500 PV of debt=8810.25*(1-1.015^-16)/0.015 Cash 30000 Gain on restructuring 30000 e. Account payable 85000 Cash 15000 Account payable(10000*6) 60000 Gain on restructuring 10000 f.Bank debt 80000 Investment securities 62000 Gain on exchange 20000 Bank debt 200000 Treasury stock 150000 Gain on restructuring 50000 Bank debt(532000-80000-200000) 242000 Accrued Interest 10000 Restructured Debt(27470.38*(1-1.02^-10)/0.02 246755 Gain on restructuring 5245 g.Bank Note Payable 60000 Restructured Debt(17000*3) 51000 Gain on restructuring 9000 h. Accumulated Depreciation 150000 Account payable 70000 Equipment 220000 Gain on restructuring 10000 Account payable 40000 Account Payable Restructured 40000 40000=PMT*(1-1.014^-6)/0.014 Qtrly.payment=$ 6997 Total amount of interest expense to be recognized in connection with the first quarterly payment associated with the restructured debts d. Shareholder loan 124500*1.5%= 1868 f. Bank debt 246755*2%= 4935 h. Creditor 40000*1.4%= 560 Total amount of interest expense for the Qtr. 7363
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