Question

Exercise 14-23 On December 31, 2017, the Shamrock 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, $3,700,000 note receivable by the following modifications: 1. Reducing the principal obligation from $3,700,000 to $2,960,000. 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 $2,960,000 in cash to Shamrock Bank. Answer the following questions related to Shamrock Bank (creditor).

What interest rate should Shamrock Bank use to calculate the loss on the debt restructuring? (Round answer to 0 decimal places, e.g. 18%.) Interest rate %

(1) Compute the loss that Shamrock Bank will suffer from the debt restructuring. (Round answer to 0 decimal places, e.g. 38,548.) Loss on restructuring of debt $ (2) Prepare the journal entry to record the loss. (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

Prepare the interest receipt schedule for Shamrock Bank after the debt restructuring. (Round answers to 0 decimal places, e.g. 38,548.) SHAMROCK BANK Interest Receipt Schedule After Debt Restructuring Effective-Interest Rate Date Cash Received Interest Revenue Increase in Carrying Amount Carrying Amount of Note 12/31/17 $ $ $ $ 12/31/18 12/31/19 12/31/20 Total $ $ $

Prepare the interest receipt entry for Shamrock Bank on December 31, 2019. (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, 2019

What entry should Shamrock Bank make on January 1, 2021? (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, 2021

Answer 1

Answer: POD & interest rate should shamrock bank use to calculate the Lass on the debt restructuring = :--> Shamrock bank should use the historical and pre vtilling interest rate do 10-7.] to calculate the loss, 0 The lose on restul turing of debt? Loss on restructuring of debt = original value de note – revised value of note. U original value do note = $3700,000. valece os note past restacturing present valere des interest payments + present value of face valere Anced Paterest payment = $ 8, 960,000 X(01. = $29,600 preved value o, amcity pomocity [v+cu+75}ly pe cand value os interest paymenis = 4296,000 X (1–113)/0.13. = $710,942

Present value. dr face value = $ 2, 960,000/1.123 = $2,106,870 902 Loss on debt restructuring= $37700,000 - 710,942 + 42,106,870) = $3,700,000 -2,817,812. = $882,188 prepare the Journal erty to record the fass: Date Account Titles and Exploration Debitco | Credit (!) Dec 31, 2017 Bad o 882,188 $88 2,188 hallowance for doubtful caccounts ☺ prepare the interest recent schedule for Shamrock bank carrying amount c Note. SHAMROCK BANK interest Receipt schedulc After Debt Restucturing Effective Interest Rate I increase in Date cash received interest tempue coinying amount 12/31/17 12/31/18 $2,96.000 33,137 $424137 12/2119 $2.96.000 $3,43;194 $47,194 $296.000 $3,48,857 $52,857 Total $1,42, 189 $ 28117,812 $08,59,944 $29,07, 143 $24;60,00]

=) cash received = $2,960,000 X 10:41 = $0.96,000 Ed interest revencie = carrying amount x 12% => increase in carrying amount - interest revenue - Cashrciceved. > carrying amount oly note = previous canyong amount of note - increase in carrying amount O Prepare interest receipt enty-fox shamrock bank on Dec 31, 2019:- credit ct) Date Account Tithes and exploration Debit can Dec 31, 2019 cash. $ 196,000 Allowance for doubleficul accounts. interest revenue Enkey should shamrock bank make on January 4, 86813 $ 47,194 $3143,194 : credit (6) Date BEL 31,2621 Debit co $29,60,000 Account Titles and explanation cash nllowance for dosebefed accouols Note receivable $1,40,000 3,00,000