At January 1, 2013, Rothschild Chair Company, Inc. was indebted to First Lincoln

Question

At January 1, 2013, Rothschild Chair Company, Inc. was indebted to First Lincoln Bank under a $20 million, 10% unsecured note. The note was signed January 1, 2010, and was due December 31, 2016. Annual interest was last paid on December 31, 2011. Rothschild Chair Company was experiencing severe financial difficulties and negotiated a restructuring of the terms of the debt agreement. Prepare all journal entries by Rothschild Chair Company, Inc. and First Lincoln Bank to record the restructuring and any remaining transactions relating to the debt, including the final payoff, under each of the independent circumstances below: (a) First Lincoln Bank agreed to settle the debt in exchange for land having a fair value of $16 million but carried on Rothschild Chair Company’s books at $13 million. (b) First Lincoln Bank agreed to (a) forgive the interest accrued from last year, (b) reduce the remaining four interest payments to $1 million each, and (c) reduce the principal to $15 million. Assume that the new effective interest rate under this scenario would be 6%. (c) First Lincoln Bank agreed to defer all payments (including accrued interest) until the maturity date and accept $27,775,000 at that time in settlement of the debt. Assume that the new effective interest rate under this scenario would be 6%. At January 1, 2013, Rothschild Chair Company, Inc. was indebted to First Lincoln Bank under a $20 million, 10% unsecured note. The note was signed January 1, 2010, and was due December 31, 2016. Annual interest was last paid on December 31, 2011. Rothschild Chair Company was experiencing severe financial difficulties and negotiated a restructuring of the terms of the debt agreement. Prepare all journal entries by Rothschild Chair Company, Inc. and First Lincoln Bank to record the restructuring and any remaining transactions relating to the debt, including the final payoff, under each of the independent circumstances below: (a) First Lincoln Bank agreed to settle the debt in exchange for land having a fair value of $16 million but carried on Rothschild Chair Company’s books at $13 million. (b) First Lincoln Bank agreed to (a) forgive the interest accrued from last year, (b) reduce the remaining four interest payments to $1 million each, and (c) reduce the principal to $15 million. Assume that the new effective interest rate under this scenario would be 6%. (c) First Lincoln Bank agreed to defer all payments (including accrued interest) until the maturity date and accept $27,775,000 at that time in settlement of the debt. Assume that the new effective interest rate under this scenario would be 6%. At January 1, 2013, Rothschild Chair Company, Inc. was indebted to First Lincoln Bank under a $20 million, 10% unsecured note. The note was signed January 1, 2010, and was due December 31, 2016. Annual interest was last paid on December 31, 2011. Rothschild Chair Company was experiencing severe financial difficulties and negotiated a restructuring of the terms of the debt agreement. Prepare all journal entries by Rothschild Chair Company, Inc. and First Lincoln Bank to record the restructuring and any remaining transactions relating to the debt, including the final payoff, under each of the independent circumstances below: (a) First Lincoln Bank agreed to settle the debt in exchange for land having a fair value of $16 million but carried on Rothschild Chair Company’s books at $13 million. (b) First Lincoln Bank agreed to (a) forgive the interest accrued from last year, (b) reduce the remaining four interest payments to $1 million each, and (c) reduce the principal to $15 million. Assume that the new effective interest rate under this scenario would be 6%. (c) First Lincoln Bank agreed to defer all payments (including accrued interest) until the maturity date and accept $27,775,000 at that time in settlement of the debt. Assume that the new effective interest rate under this scenario would be 6%.

Explanation / Answer

a. Transfer of land:

b. Rothschild chair company:

Gain on restructuring calculation:

Note balance+ interest payable= 22000000

Future payaments after restructuring:

Principle= 15000000

Interest= 1000000*4= 4000000

Total payments= 19000000

Gain= 22M-19M= 3M

Entries:

Books of lincoln bank:

Loss on restruring calculation:

Book balance= 22000000

Present value of future cash receipts at historical discount rate of 10%:

Entry:

c. No gain on restructuring to Rothschild chair company as total future cash payments 27775000 exceeds the book value of 22000000.

For first lincoln bank:

Present value of 27775000= 27775000*0.683= 18970699

Hence it is less than the book value of 22M loss on restructuring= 22000000-18970699= 3029301

Entry:

General Journal in the books of Rothschild chair company Dr/Cr Account Amount Narration Dr Note payable 20000000 Dr Accrued interest payable 2000000 Accrued interest for 1 year-2012 Cr Land 13000000 Cr Gain on transfer of land 3000000 Land fair value 16M- Book value 13M Cr Gain on restructuring 6000000 Payable 22M- Land value16M

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