Question

On December 31, 2020, Martinez 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, $4,500,000 note receivable by the following modifications:

1.		Reducing the principal obligation from $4,500,000 to $3,600,000.
2.		Extending the maturity date from December 31, 2020, to January 1, 2024.
3.		Reducing the interest rate from 12% to 10%.

Barkley pays interest at the end of each year. On January 1, 2024, Barkley Company pays $3,600,000 in cash to Martinez Bank. Answer the following questions related to Martinez Bank (creditor)

(1) Compute the loss that Martinez 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, 2020

Answer 1

	Loss of receivables on debt restructuring		450000-3600000
		=	900000
	Loss of interest on the above each year		900000*12%
		=	108000
	Loss of interest of 2%(12%-10%) on the amount each year		3600000*2%
		=	72000
	Total loss each year	(108000+72000)	180000
Year	Present value factor @12%	Loss of Cashflows	Present value of cash flows
0	1	900000	900000
1	0.892857143	180000	160714.2857
2	0.797193878	180000	143494.898
3	0.711780248	180000	128120.4446
		Total present value of loss	1332329.628
		Rounding off to	1332329
	Entry for the loss	Debit	Credit
	Profit and loss account	1332329
	Loss on restructuring account		1332329