Exercise 14-24 (Part Level Submission) On December 31, 2017, the American Bank e

Question

Exercise 14-24 (Part Level Submission)

On December 31, 2017, the American Bank enters into a debt restructuring agreement with Marigold Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $4,400,000 note receivable by the following modifications:

Marigold pays interest at the end of each year. On January 1, 2021, Marigold Company pays $2,990,000 in cash to American Bank.

Can Marigold Company record a gain under this term modification?

Answer: Yes

If yes, compute the gain for Marigold Company. If no, enter amount as 0.

1. Reducing the principal obligation from $4,400,000 to $2,990,000. 2. Extending the maturity date from December 31, 2017, to January 1, 2021. 3. Reducing the interest rate from 12% to 10%.

Explanation / Answer

1. Total future cash flows after restructuring are: $ 2990000 x 10% x 4 = $ 1196000

$ 1196000 + $ 2990000 = $ 4186000

2. Since total future cash flows after restructuring does not exceeds the total pre restructuring carrying amount of the note, there is a gain of $ 4400000 - $ 4186000 = $ 214000

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