Question

On December 31, 2020, Green Bank enters into a debt restructuring agreement with Shamrock Inc., which is now experiencing financial trouble. The bank agrees to restructure a $2.3-million, 10% note receivable issued at par by the following modifications: 1. Reducing the principal obligation from $2.3 million to $2.19 million 2. Extending the maturity date from December 31, 2020, to December 31, 2023 3. Reducing the interest rate from 10% to 8% Shamrock pays interest at the end of each year. On January 1, 2024, Shamrock Inc. pays $2.19 million in cash to Green Bank. Shamrock prepares financial statements in accordance with IFRS 9 Prepare an entry at December 31, 2020, based on the results of your calculation. (Round answers to o decimal places, e.g. 5,275. Credit account tities are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter for the amounts.) Debit Credit Date Account Titles and Explanation December 31, 2020 Prepare an effective interest amortization table for the remaining term of the note. (Round answers to O decimal places, e.g. 5,250.) SHAMROCK INC. INTEREST PAYMENT SCHEDULE AFTER DEBT RESTRUCTURING Increase Cash Interest Effective Interest Carrying Amount Carrying Amount of Note Date 12/31/20 12/31/21 12/31/22 12/31/23 s D $ Total Prepare the interest payment entry for Shamrock on December 31, 2022, and the entry on January 1, 2024. (Round answer to o decimal places, e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter for the amounts.) Date Account Titles and Explanation Debit Credit Assume instead that Shamrock follows ASPE, Using (1) a financial calculator or (2) Excel function Rate, calculate the rate of interest that Shamrock should use to calculate its interest expense in future periods. (Hint: Refer to Chapter 3 for tips on calculating.) (Round answer to 4 decimal places, e.g. 1.2246%.) Rate of interest Continuing the assumption of following ASPE, prepare an effective interest amortization table for the remaining term of the note. (Round yield values to 4 decimal places, e.g. 52.7525 and final answers to o decimal places, e.g. 5,250.)

Answer 1

a)
The Green Bank should use the historical interest rate of 10% to calculate the loss
Pre-restructuring carrying amount of note		$2,300,000
Less:
Present value of restructured cash flows
Principal = PV(10%,3,0,-2190000)	$1,645,379
Annual Interest ($2,190,000 X 8%  = 175,200; PV(10%,3,-175200)	$435,696	$2,081,076
Loss on debt restructuring		$218,924
Prepare the journal entries
Account Titles and Explanation	Debit	Credit	$
Bad Debt Expense	$218,924
Allowance for Doubtful Accounts		$218,924
b) PREPARE THE INTEREST RECEIPT SCHEDULE AFTER DEBT RESTRUCTURING
GREEN BANK
INTEREST RECEIPT SCHEDULE AFTER DEBT RESTRUCTURING
EFFECTIVE INTEREST RATE 10%
Date	Cash Interest 8%	EffectiveInterest (10%)	Increasein Carrying Amount	Carrying Amount of Note
12/31/20				$2,081,076
12/31/21	$175,200	$208,108	$32,908	$2,113,983
12/31/22	$175,200	$211,398	$36,198	$2,150,182
12/31/23	$175,200	$215,018	$39,818	$2,190,000
Total	$525,600	$634,524	$108,924
c)
Date	Account Titles and Explanation	Debit	Credit
December 31, of 2022	Cash	$175,200
	Allowance for Doubtful Accounts	$36,198
	Interest Revenue		$211,398
Payment entry at maturity
Jan 1,2024	Cash	$2,190,000
	Allowance for Doubtful Accounts	$110,000
	Notes Receivables		$2,300,000