Question

On December 31, 2020, 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, $2,320,000 note receivable by the following modifications: 1. Reducing the principal obligation from $2,320,000 to $1,856,000. 2. Extending the maturity date from December 31, 2020, to January 1, 2024. 3. Reducing the interest rate from 12% to 10%. Marigold pays interest at the end of each year. On January 1, 2024, Marigold Company pays $1,856,000 in cash to Americ Bank. Will the gain recorded by Marigold be equal to the loss recorded by American Bank under the debt restructuring? No SHOW LIST OF ACCOUNTS LINK TO TEXT Can Marigold Company record a gain under the term modification mentioned above? No SHOW LIST OF ACCOUNTS

Answer 1

a. No

The gain recorded by the company is not equal to loss recorded by the bank under the debt restructuring agreement.

b. No

There is no gain under modified terms because the total future cash flows after restructuring exceed the total pre-restructuring carrying amount of the note (Principal)

The total future cash flows after restructuring would be $2412800 (1856,000 + (1856000 *10% *3))and total pre - restructuring carrying amount is $2320,000

c.

Interest Receipt Schedule After Debt Restructuring
Effective Interest Rate (1.4276%)
Date	Cash Received	Interest Revenue	Increase in Carrying Amount	Carrying Amount Note
$       44,196				$          2,320,000
$       44,561	$           185,600	$       33,120	$       152,480	$          2,167,520
$       44,926	$           185,600	$       30,944	$       154,656	$          2,012,864
$       45,291	$           185,600	$       28,736	$       156,864	$          1,856,000
Total	$           556,800	$       92,800	$       464,000

d.

Date	Account Title and Explanation	Debit	Credit
31-Dec-22	Notes Payable	$    154,656.00
	Interest Expense	$      30,944.00
	Cash		$      185,600.00

e.

Date	Account Title and Explanation	Debit	Credit
1-Jan-24	Notes Payable	$   1,856,000.00
	Cash		$   1,856,000.00