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4. Pinker Corporation is having financial difficulty and therefore has asked Red Meadow State Bank to restructure its $1 mill
(b) Red Meadow State Bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book val
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Ans. a.: Based on the information, it is clear that prior to restructuring debt in form of commercial paper was standing at value of $10,00,000. So restructuring of this in between Pinker and Red Meadow State Bank gives gain on restructuring to Pinker by value of $200,000 ($10,00,000-$800,000) and loss to Red Meadow State Bank. Journal entries in books of Pinker & Red Meadow Bank will be as following:

Date Accounts Debit Credit
In Books of Pinker Commercial Paper Payable $10,00,000
Common Stock (at Par $50,000 x 16) $800,000
Gain on Debt on Restructuring $200,000
In Books of Red Meadow State Bank Investment in Pinker $800,000
Loss on Investment $200,000
Commercial Paper Receivable $10,00,000

(b) Given in case, it is mutually agreed in between Pinker & Red Meadow State Bank to restructure Commercial Paper of value $10,00,000 in exchange of land at value of $900,000 of which book value is $500,000. Herein this case Pinker is getting gain of $400,000 on disposal of the investment property used in transfer ($900,000 fair value less $500,000 book value) and a gain on restructuring of $100,000 ($10,00,000 carrying amount of commercial paper less $900,000 fair value of land).

Date Accounts Debit Credits
In the Books of Pinker Land $400,000
Gain on Transfer of Land $400,000
Commercial Paper Payable $10,00,000
Land $900,000
Gain on Debt Restructuring $100,000
In the books of Red Meadow State Bank Land $900,000
Loss on Investment $100,000
Commercial Paper Receivable $10,00,000

(c) Under given condition Red Meadow State Banks agree to modify the terms of notes, in which it is agreed that Pinker has not to pay any interest on the note over the 2-Year Period. So for this agreement the accounting treatment entries will be passed in books of Pinker as well as Red Meadow State Bank only when actual liability of interest is accrued or paid. For this modification, there will be no accounting treatment in either books.

(d) Red Meadow State Bank agrees to reduce the principal to value of $875000 and require interest @15% only in the second year. So as on date accounting entry only for reduction in value of commercial paper will be passed in books of Pinker as well as Red Meadow State Bank. Here is Gain on Debt Restructuring to Pinker is $125,000 and this is loss to Red Meadow State Bank. So Journal Entry for this gain/loss will be passed in both books.

Date Accounts Debit Credit
In the Books of Pinker Commercial Paper Payable $125,000
Gain on Debt Restructuring $125000
In the Books of Red Meadow State Bank Loss on Investment $125,000
Commercial Paper Receivable $125,000
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