Question

Exercise 14-23 (Part Level Submission) On December 31, 2020, Cullumber 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, $3,900,000 note receivable by the following modifications: 1. Reducing the principal obligation from $3,900,000 to $3,120,000. 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 $3,120,000 in cash to Cullumber Bank. Answer the following questions related to Cullumber Bank (creditor). (a) Your answer is correct. What interest rate should Cullumber Bank use to calculate the loss on the debt restructuring? (Round answer to 0 decimal places, e.g. 18%.) Interest rate % SHOW LIST OF ACCOUNTS SHOW SOLUTION SHOW ANSWER LINK TO TEXT Attempts: 1 of 3 used (b) (1) Compute the loss that Cullumber 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 SHOW LIST OF ACCOUNTS LINK TO TEXT Attempts: 0 of 3 used SAVE FOR LATER SUBMIT ANSWER (c) The parts of this question must be completed in order. This part will be available when you complete the part above. (d) The parts of this question must be completed in order. This part will be available when you complete the part above. (e) The parts of this question must be completed in order. This part will be available when you complete the part above.

Answer 1

Debt resturcturing porcess
Bank as per agreement restructure Debt in below manner:
Reducing the principal obligation from $3900,000 to $ 3,120,000
Extended maturity date - 31st Dec 2020 to Jan 1 2024
Reduction in Interest rate from 12% == 10%
Now we need to calcuate Present value , determined loss due to restructure and necessary adjusted Jopurnal Entry
					Amnt($)
Original Principalm Amount of Loan $					39,00,000	(a)
As per question , Company need to pay loan Interest
in 3 year time period , So need to calculate present value to determined Net loss
Present value of Principal amount $ 3120000 * 12% at 3 rd year( Discount factor=0.71)					22,20,754
Present value of Interest l amount $ 3120000 * 10% over 3 year( Discount factor=2.40)					7,49,371
$3120000*10%				Total present value	29,70,126	(b)
	Discount factor			Loss due to debt restucturing	9,29,874	(a-b)
Year 1	0.89
Year 2	0.80
Year 3	0.71
Sum of Annuity	2.40
Journal Entry to accounted above loss
Details	Debit ($)	Credit$)
Bad Debt Expense	9,29,874
Doubtful debt allowance		9,29,874
No we need to derived Interest Difference - benefit and impact on carrying Amount
date	Rate Interest -10% $-a	Rate Interest -12% $-b=(12%on C)	Change in Interest rate$(b-a)	carrying Amount $ present value ( as above )-C
31St Dec 20				29,70,126
31St Dec 21	3,12,000	3,56,415	44,415	30,14,541
31St Dec 22	3,12,000	3,61,745	49,745	30,64,286
31St Dec 23	3,12,000	3,67,714	55,714	31,20,000
			1,49,874
Rate Interest -10%	10%*$3120000
Year wise Journal Entry
31St Dec 21
Details	Debit ($)	Credit$)
cash	3,12,000
Doubtful Debt allowance	44,415
Interest revenue		3,56,415
(Company losing 2 % Interest on each yeat (12% Actual rate of interest - charged 10% only)
31St Dec 22
Details	Debit ($)	Credit$)
cash	3,12,000
Doubtful Debt allowance	49,745
Interest revenue		3,61,745
31St Dec 23
Details	Debit ($)	Credit$)
cash	3,12,000
Doubtful Debt allowance	55,714
Interest revenue		3,67,714
On 1st jan 2024 - Final date to replay amount
Details	Debit ($)	Credit$)
cash	31,20,000
Doubtful Debt allowance	7,80,000
Interest revenue		39,00,000