At January 1, 2013, Rothschild Chair Company, Inc. was indebted to First Lincoln
ID: 2566320 • Letter: A
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
Solution A Book of Rothshield Land Dr 3 To Gain on Land revaluation 3 (Being gain on land valued mark to market) Loan payable Dr 20 Interest payable Dr 2 To Land 16 To Gain on restrucuring 6 (Being loan settled with land) Book of Bank Land Dr 16 Loss on restructuring Dr 6 To Loan receivable 20 To Interest receivable 2 (Being Loan squired off with Land in exchange) Solution B Year 1 Year 2 Year 3 Year 4 Interest payable 1 1 1 1 Loan payable 15 Total 1 1 1 16 PV factor @ 6% 0.943396226 0.88999644 0.839619 0.792093663 PV 0.94 0.89 0.84 12.67 Total PV of loan payable 15.35 Book of Rothshield Book of Bank Loan payable Dr 20 New Loan Dr 15.35 Interest payable Dr 2 Loss on restructuring Dr 6.65 To New Loan 15.35 To Old Loan receivable 20 To Gain on restrucuring 6.65 To Old Loan Interest receivable 2.00 (Being loan restructured with New loan) (Being loan restructured with New loan) Year 1 end Year 1 end Interest expense Dr 0.92 Loan receivable Dr 0.92 To Loan payable (15.35*6%) 0.92 To Interest income 0.92 (Being Interest accrued) (Being Interest accrued) Loan payable Dr 1 bank Dr 1 To Bank 1 To Loan recevable 1 (Being installment paid) (Being installment paid) Year 2 end Year 2 end Interest expense Dr 0.92 Loan receivable Dr 0.92 To Loan payable (15.27*6%) 0.92 To Interest income 0.92 (Being Interest accrued) (15.35+0.92-1)=15.27 (Being Interest accrued) Loan payable Dr 1 bank Dr 1 To Bank 1 To Loan recevable 1 (Being installment paid) (Being installment paid) Year 3 end Year 3 end Interest expense Dr 0.91 Loan receivable Dr 0.91 To Loan payable (15.19*6%) 0.91 To Interest income 0.91 (Being Interest accrued) (15.27+0.92-1)=15.19 (Being Interest accrued) Loan payable Dr 1 bank Dr 1 To Bank 1 To Loan recevable 1 (Being installment paid) (Being installment paid) Year 3 end Year 3 end Interest expense Dr 0.90 Loan receivable Dr 0.90 To Loan payable (15.10*6%) 0.90 To Interest income 0.90 (Being Interest accrued) (15.19+0.91-1)=15.10 (Being Interest accrued) Loan payable Dr 16 bank Dr 16 To Bank 16 To Loan recevable 16 (Being installment paid) (Being installment paid) Solution 3 Loan repaid 27775000 PV @ 6% =27775000/(1+6%)^4 22,000,000 Loan repayable 22,000,000 Book of Rothshield Book of Bank Loan payable Dr 20 New Loan Dr 22 Interest payable Dr 2 To New Loan 22.00 To Old Loan receivable 20 To Old Loan Interest receivable 2.00 (Being loan restructured with New loan) (Being loan restructured with New loan) Year 1 end Year 1 end Interest expense Dr 1.32 Loan receivable Dr 1.32 To Loan payable (22*6%) 1.32 To Interest income 1.32 (Being Interest accrued) (Being Interest accrued) Year 2 end Year 2 end Interest expense Dr 1.40 Loan receivable Dr 1.40 To Loan payable (23.32*6%) 1.40 To Interest income 1.40 (Being Interest accrued) (22+1.32)=23.32 (Being Interest accrued) Year 3 end Year 3 end Interest expense Dr 1.48 Loan receivable Dr 1.48 To Loan payable (24.72*6%) 1.48 To Interest income 1.48 (Being Interest accrued) (23.32+1.40)=24.72 (Being Interest accrued) Year 3 end Year 3 end Interest expense Dr 1.57 Loan receivable Dr 1.57 To Loan payable (26.20*6%) 1.57 To Interest income 1.57 (Being Interest accrued) (24.72+1.48)=26.2 (Being Interest accrued) Loan payable Dr 27.77 bank Dr 27.77 To Bank 27.77 To Loan recevable 27.77 (Being installment paid) (Being installment paid)
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