Question

Exercise 14-23 (Part Level Submission) On December 31, 2020, Cullumber Bank enters into a debt restructuring agreement with Barkley Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $3,900,000 note receivable by the following modifications: 1. Reducing the principal obligation from $3,900,000 to $3,120,000. 2. Extending the maturity date from December 31, 2020, to January 1, 2024. 3. Reducing the interest rate from 12% to 10%. Barkley pays interest at the end of each year. On January 1, 2024, Barkley Company pays $3,120,000 in cash to Cullumber Bank. Answer the following questions related to Cullumber Bank (creditor).

(a) Your answer is correct. What interest rate should Cullumber Bank use to calculate the loss on the debt restructuring? (Round answer to 0 decimal places, e.g. 18%.) Interest rate % SHOW LIST OF ACCOUNTS SHOW SOLUTION SHOW ANSWER LINK TO TEXT Attempts: 1 of 3 used

(b) Your answer is correct. (1) Compute the loss that Cullumber Bank will suffer from the debt restructuring. (Round answer to 0 decimal places, e.g. 38,548.) Loss on restructuring of debt $ (2) Prepare the journal entry to record the loss. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit December 31, 2020 SHOW LIST OF ACCOUNTS SHOW SOLUTION SHOW ANSWER LINK TO TEXT Attempts: 2 of 3 used

(c) Prepare the interest receipt schedule for Cullumber Bank after the debt restructuring. (Round answers to 0 decimal places, e.g. 38,548.) CULLUMBER BANK Interest Receipt Schedule After Debt Restructuring Effective-Interest Rate Date Cash Received Interest Revenue Increase in Carrying Amount Carrying Amount of Note 12/31/20 $ $ $ $ 12/31/21 12/31/22 12/31/23 Total $ $ $

Answer 1

Required a) Cullumber Bank should use 12% historical rate to calculate the loss Required b) 1 Loss to Cullumber Bank $ 3,900,000 Pre-structructing carrying amount of Note Less: Present Value of re-structured cash flow Present Value of principal 3120,000 due in 3 years at 12% Present Value of interest 312000 annualy for 3 year at 12% (Interest is 3120,000*10%) 3120000*0.71178 312000 * 2.401831 2,220,754 749,371 $ $ 2,970,125 Loss on Debt Resturcturing $ 929,875 Required b)2 Date Account Debit Credit December 31, 2020 929,875 Bad Debt Expense Allowance for doubtful account (being restructuring loss booked) 929,875

Required C) Interest Receipt Schedule Date Cash Received 10% Interest Revenue 12% Increase Carrying Amount Carrying Amount Dec 31, 2020 Dec 31, 2021 312,000 $ 356,415 S Dec 31, 2022 312,000 $ 361,745 $ Dec 31, 2023 312,000 $ 367,714 $ Total 936,000 $ 1,085,874 $ 55,175 = 55174+1. $ 1 added to get carrying value to 3120,000 please comment if you have any doubt Please give thumps up if you satisfied with the answer $ 44,415$ 49,745$ 55,715$ 149,875 $ 2,970,125 3,014,540 3,064,285 3,120,000 9,198,824