Question

Problem # 4 (30): Vaughn Company borrowed $40m from Livingston Security Financing (LSF) by issuing at par a 5.6% annual-coupon note. After making the sixth of ten required payments, Vaugh and LSF restructured the note by reducing the principal and coupon rate to $32 m and 3.6%, respectively. Vaugh agreed to make five additional payments at the new rate. 32009000X.136=1152000 Required: Provide the following information: a) Amount of gain or loss recorded by Vaughn at the restructuring. b) Amount of gain or loss recorded by LSF at the restructuring. c) Amount of the interest revenue accrual

Answer 1

Solution:

Computation of Loss/Gain from re-structuring:

Amount to be repaid as per the old scheme

Principal repayment                                                                        $ 40 million

Add: Interest to be paid $ 8.96 million

($ 40 million x 5.6% x 4)

Total remaining amount to be paid (A) $ 48.96 million

Amount to be repaid as per the new scheme

Principal repayment                                                                        $ 32 million

Add: Interest to be paid $ 5.76 million

($ 32 million x 3.6% x 5)

Total remaining amount to be paid (B) $ 37.76 million

Gain or Loss from Restructuring =          $ 48.96 million - $ 37.76 million

                                                            =          $ 11.20 million

a) Amount of Gain recorded by Vaughn at the restructuring is $ 11.20 million.

b) Amount of Loss recorded by LSF at the restructuring is $ 11.20 million.

c) Amount of interest revenue accrual (assuming not paid):

            As on the date of restructuring                                     =          $ 2.24 million

            ($ 40 million x 5.6%)

OR

            At the end of the year in which restructuring done =          $ 1.152 million

            ($ 32 million x 3.6%)

Note: In the solution of sub-part c), there is no any information related to when we should calculate or the date on which we have to calculate the amount of interest revenue accrual; hence I have calculated on both dates i.e. restructuring date as well as the year-end date.