Question

On December 31, 2020, American Bank enters into a debt restructuring agreement with Swifty Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $3,310,000 note receivable by the following modifications: 1. Reducing the principal obligation from $3,310,000 to $2,648,000. 2. Extending the maturity date from December 31, 2020, to January 1, 2024. 3. Reducing the interest rate from 12% to 10%. Swifty pays interest at the end of each year. On January 1, 2024, Swifty Company pays $2,648,000 in cash to American Bank.

Will the gain recorded by Swifty be equal to the loss recorded by American Bank under the debt restructuring? NoYes

Can Swifty Company record a gain under the term modification mentioned above? NoYes

Assuming that the interest rate Swifty should use to compute interest expense in future periods is 1.4276%, prepare the interest payment schedule of the note for Swifty Company after the debt restructuring. (Round answers to 0 decimal places, e.g. 38,548.) SWIFTY 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 $ $ $ $ 12/31/21 12/31/22 12/31/23 Total $ $ $

Prepare the interest payment entry for Swifty Company on December 31, 2022. (Round answers to 0 decimal places, e.g. 38,548. 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, 2022

What entry should Swifty make on January 1, 2024? (Round answers to 0 decimal places, e.g. 38,548. 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, 2024 Click if you would like to Show Work for this question: Open Show Work

Answer 1

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Part a
No
Part b
No, Total future cash flow after restructuring exceeds the pre-restructuring cartyin value.
Principal		$                        2,648,000
Interest	$2,648,000*10%*3	$                            794,400
Future Cash Flow		$                        3,442,400
Pre-structuring carrying value		$                        3,310,000
Part c
Date	Cash Paid 10%	Int Expense 1.4276%	Reduction of carrying amount	Carrying amount
,12/31/2020				$               3,310,000
,12/31/2021	$               264,800	$                              47,254	$                                               217,546	$               3,092,454
,12/31/2022	$               264,800	$                              44,148	$                                               220,652	$               2,871,801
,12/31/2023	$               264,800	$                              40,999	$                                               223,801	$               2,648,000
Total	$               794,400	$                            132,400	$                                               662,000
Part d	Debit	Credit
Note Payable	$               220,652
Interest Expense	$                 44,148
Cash		$                            264,800
Part e
Note Payable	$           2,648,000
Cash		$                        2,648,000