Question

Exercise 14-22 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

Part 1

NO.

The debtor is not addressed by GAAP, due to "accounting asymmetry" treatment. It was the concern of FASB that the scope expansion of its pronouncement would result into the delay in the issuance of GAAP for the creditor

Part 2

NO

Total future cash flows after restructuring > total pre-restructuring carrying of the note (principal).

Total future cash flows after restructuring
Principal	2648000
Interest ((2648000*10%)*3)	794400
Total	3442400
Total pre-restructuring carrying amount of note	3310000

Part 3

SWIFTY COMPANY

Interest Payment Schedule after Debt Restructuring

Effective-Interest Rate

date	Cash paid	Interest expense	Reduction of carrying amount	Carrying amount of note
12/31/17				3310000
12/31/18	264800	47254	217546	3092454
12/31/19	264800	44148	220652	2871802
12/31/20	264800	40998	223802	2648000

2648000*10% = 352000

Interest expense = previous year carrying amount of note * 1.4276%

Reduction of carrying amount = cash paid – interest expense

Carrying amount of note = previous year carrying amount of note – reduction of carrying amount

Part 4

Date	General journal	Debit	Credit
December 31, 2019	Notes payable	220652
	Interest expense	44148
	Cash		264800
	(to record the payment of interest)

Part 5

Date	General journal	Debit	Credit
January 1, 2021	Notes payable	2648000
	Cash		2648000
	(to record the repayment of notes payable)