Question

On December 31, 2017, the Sarasota Bank enters into a debt restructuring agreement with Barkley Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $4,100,000 note receivable by the following modifications: 1. Reducing the principal obligation from $4,100,000 to s2,780,000. 2. Extending the maturity date from December 31, 2017, to January 1, 2021. 3. Reducing the interest rate from 12% to 10%. Barkley pays interest at the end of each year. On January 1, 2021, Barkley Company pays $2,780,000 in cash to Sarasota Bank. Answer the following questions related to Sarasota Bank (creditor) Compute the loss Sarasota Bank will suffer under this new term modification. (Round answer to o decimal places, e.g. 38,548.) Loss on restructuring of debt Prepare the journal entry to record the loss on Sarasota's books. (Round answers to O 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, 2017

Answer 1

Calculate the amount of loss S bank will suffer as follows: S4,100,000 Pre-structuring carrying amount of Note Less: Present Value of re-structured cash flow Present Value of principal $2.780,000 due in 3 years at 12% Present Value of interest S2,780,000 anmally for 3 year at 12% Interest is S2,780,000*10%) Loss on Debt Restructuring 2780000X0.71178 278000X2.401831 1978748.4 667709.02 $2.646.457 $1,453,543 Therefore, loss on debt restructuring is $1,453, 543. Pass the journal entry to record the loss on S's books as follows: Credit Debit $1,453,543 Accounts title Dec 31 2017 Bad Debt expenses Allowance for doubtful debts Being restructuring loss booked.) $1.453 543