Exercise 14-27 Vargo Corp Because Vargo Corp. 31, 2019, reduce the principal to
ID: 2606432 • Letter: E
Question
Exercise 14-27 Vargo Corp Because Vargo Corp. 31, 2019, reduce the principal to $220,000, and reduce the interest r p. owes $270,000 to First Trust. The debt is a 10-year, 12% note due December 31, 2017. is in financial trouble, First Trust agrees to extend the maturity date to December December 31. ate to 5%, payable annually on (a) Prepare the journal entries on Vargo's books on December 31, 2017, 2018, 2019. (b) Prepare the journal entries on First Trust's books on December 31, 2017, 2018, 2019. (a) Date Account Titles and Explanation Debit Credit Vargo Corp.'s 2017 2018 2019 (b) Date Account Titles and Explanation Debit Credit 2017 2018 2019 (To record Interest Revenue) (To record maturity of Notes Receivable) Question Attempts: Unlimited 5 Sors ine or reaned companes All rights reservedExplanation / Answer
Solution:
Debit
Credit
Vargo Corp.’s entries
31-Dec-17
Dr. Notes Payable
28,000
Cr. Gain on Restructuring of Debt
28,000
31-Dec-18
Dr. Notes Payable
11,000
Cr. Cash
11,000
(5% * $220,000)
31-Dec-19
Dr. Notes Payable
231,000
Cr. Cash
231,000
220,000 + (5% * $220,000)
First Trust's entries
31-Dec-17
Dr. Bad Debt Expense
73,027*
Cr. Allowance for Doubtful Accounts
73,027
31-Dec-18
Dr. Cash
11,000
Dr. Allowance for Doubtful Accounts
12,277
Cr. Interest Revenue
23,277
31-Dec-19
Dr. Cash
11,000
Dr. Allowance for Doubtful Accounts
13,750
Cr. Interest Revenue
24,750
Dr. Cash
220,000
Dr. Allowance for Doubtful Accounts
50,000
Cr. Interest Revenue
270,000
Working:
Pre-restructure carrying amount
PV of restructured cash flows
270,000
PV of $220,000 due in 2 years at 12%, interest payable annually
($220,000 * .79719)
175,382
PV of $11,000 interest payable annually for 2 years at 12%
($11,000 X 1.69005)
18,591
193,973
Creditor’s loss on restructuring of debt
-76,027
Date
Cash Interest
Effective interest
Increase in carrying amount
Carrying amount of note
31-Dec-17
193,973
31-Dec-18
11,000
23,277
12,277
206,250
31-Dec-19
11,000
24,750
13,750
220,000
220,000 * 0.5
11,000
193,973 * 12%
23,227
23,277 - 11,000
12,277
Debit
Credit
Vargo Corp.’s entries
31-Dec-17
Dr. Notes Payable
28,000
Cr. Gain on Restructuring of Debt
28,000
31-Dec-18
Dr. Notes Payable
11,000
Cr. Cash
11,000
(5% * $220,000)
31-Dec-19
Dr. Notes Payable
231,000
Cr. Cash
231,000
220,000 + (5% * $220,000)
First Trust's entries
31-Dec-17
Dr. Bad Debt Expense
73,027*
Cr. Allowance for Doubtful Accounts
73,027
31-Dec-18
Dr. Cash
11,000
Dr. Allowance for Doubtful Accounts
12,277
Cr. Interest Revenue
23,277
31-Dec-19
Dr. Cash
11,000
Dr. Allowance for Doubtful Accounts
13,750
Cr. Interest Revenue
24,750
Dr. Cash
220,000
Dr. Allowance for Doubtful Accounts
50,000
Cr. Interest Revenue
270,000
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