Question

Exercise 14-22 (Part Level Submission) On December 31, 2020, American Bank enters into a debt restructuring agreement with Flint Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $3,890,000 note receivable by the following modifications: 1. Reducing the principal obligation from $3,890,000 to $3,112,000. 2. Extending the maturity date from December 31, 2020, to January 1, 2024. 3. Reducing the interest rate from 12% to 10%. Flint pays interest at the end of each year. On January 1, 2024, Flint Company pays $3,112,000 in cash to American Bank.

(a) Your answer is correct. Will the gain recorded by Flint be equal to the loss recorded by American Bank under the debt restructuring? NoYes SHOW LIST OF ACCOUNTS SHOW SOLUTION SHOW ANSWER LINK TO TEXT Attempts: 2 of 3 used

(b) Your answer is correct. Can Flint Company record a gain under the term modification mentioned above? NoYes SHOW LIST OF ACCOUNTS SHOW SOLUTION SHOW ANSWER LINK TO TEXT Attempts: 1 of 3 used

(c) Assuming that the interest rate Flint should use to compute interest expense in future periods is 1.4276%, prepare the interest payment schedule of the note for Flint Company after the debt restructuring. (Round answers to 0 decimal places, e.g. 38,548.) FLINT 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 $ $ $

Answer 1

Flint Company Requirement a No. The gain recorded by Flint will not be equal to the loss recorded by American Bank under the debt restructuring agreement because GAAP does not address debtor accounting. Requirement b No, After restructuring, debtor is liable to pay $4045600 that is $155600 greater than carrying value of debt. The cash flow after restructuring exceeds the total pre-restructuring amount on note. Hence, the Company need not to record gain under the term modification Loss on restructuring to debtor Carrying value Old Interest rate New Interest Rate (after restructuring): New Principle Due (after restructuring value): New Interest Payment due: (after restructuring) ($3,112,000 X 10%) Total New Interest Payment (311200*3) Total cash flow after restructuring 3890000 12% 10% 3112000 a 311200 933600 b 4045600 a + b

Requirement c Interest payment Schedule after restructuring Payment Payment Cash Interest Reduction in Number Date Paid 10% Expense (1.4276%) Carrying amount 31.12.2020 1 31.12.2021 311200 55534 255666 2 31.12.2022 311200 51884 259316 3 31.12.2023 311200 48183 263017 Carrying Value 3890000 3634334 3375017 3112000 Total 933600 155600 778000 $3,112,000 X 10% = $311,200 $3,890,000 X 1.4276% = $55,534 $311,200 - $55,534 = $255,666