Question

On December 31, 2020, American Bank enters into a debt restructuring agreement with Marin Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $4,310,000 note receivable by the following modifications: 1. Reducing the principal obligation from $4,310,000 to $3,448,000. 2. Extending the maturity date from December 31, 2020, to January 1, 2024. 3. Reducing the interest rate from 12% to 10%. Marin pays interest at the end of each year. On January 1, 2024, Marin Company pays $3,448,000 in cash to American Bank. Will the gain recorded by Marin be equal to the loss recorded by American Bank under the debt restructuring? No Yes Can Marin Company record a gain under the term modification mentioned above? O Assuming that the interest rate Marin should use to compute interest expense in future periods is 1.4276%, prepare the interest payment schedule of the note for Marin Company after the debt restructuring. (Round answers to o decimal places, e.g. 38,548.) MARIN COMPANY Interest Payment Schedule After Debt Restructuring Effective-Interest Rate Reduction Interest of Carrying Expense Amount Cash Paid Carrying Amount of Note Date 12/31/20 12/31/21 12/31/22 12/31/23 Total

Answer 1

Part 1

NO.

The debtor is not addressed by GAAP, due to "accounting asymmetry" treatment. It was the concern of FASB that the scope expansion of its pronouncement would result into the delay in the issuance of GAAP for the creditor

Part 2

NO

Total future cash flows after restructuring > total pre-restructuring carrying of the note (principal).

Total future cash flows after restructuring
Principal	3448000
Interest ((3448000*10%)*3)	1034400
Total	4482400
Total pre-restructuring carrying amount of note	4310000

Part 3

MARIN COMPANY

Interest Payment Schedule after Debt Restructuring

Effective-Interest Rate

date	Cash paid	Interest expense	Reduction of carrying amount	Carrying amount of note
12/31/20				4310000
12/31/21	344800	61530	283270	4026730
12/31/22	344800	57486	287314	3739415
12/31/23	344800	53385	291415	3448000

3448000*10% = 352000

Interest expense = previous year carrying amount of note * 1.4276%

Reduction of carrying amount = cash paid – interest expense

Carrying amount of note = previous year carrying amount of note – reduction of carrying amount

Part 4

Date	General journal	Debit	Credit
December 31, 2022	Notes payable	287314
	Interest expense	57486
	Cash		344800
	(to record the payment of interest)

Part 5

Date	General journal	Debit	Credit
January 1, 2024	Notes payable	3448000
	Cash		3448000
	(to record the repayment of notes payable)