Question

On December 31, 2020, American Bank enters into a debt restructuring agreement with Kingbird Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $2,720,000 note receivable by the following modifications:

1.		Reducing the principal obligation from $2,720,000 to $2,176,000.
2.		Extending the maturity date from December 31, 2020, to January 1, 2024.
3.		Reducing the interest rate from 12% to 10%.

Kingbird pays interest at the end of each year. On January 1, 2024, Kingbird Company pays $2,176,000 in cash to American Bank.

Part 1

Correct answer iconYour answer is correct.

Will the gain recorded by Kingbird be equal to the loss recorded by American Bank under the debt restructuring?

                                                                      NoYes

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Part 2

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Can Kingbird Company record a gain under the term modification mentioned above?

                                                                      NoYes

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Part 3

Assuming that the interest rate Kingbird should use to compute interest expense in future periods is 1.4276%, prepare the interest payment schedule of the note for Kingbird Company after the debt restructuring. (Round answers to 0 decimal places, e.g. 38,548.)

KINGBIRD COMPANY Interest Payment Schedule After Debt Restructuring Effective-Interest Rate
Date		Cash Paid		Interest Expense		Reduction of Carrying Amount		Carrying Amount of Note
12/31/20		$		$		$		$
12/31/21
12/31/22
12/31/23
Total		$		$		$

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Part 4

Prepare the interest payment entry for Kingbird Company on December 31, 2022. (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, 2022

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Part 5

What entry should Kingbird make on January 1, 2024? (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, 2024

Answer 1

Answer:

a)
No, the gain recorded by Company B is not Equal to the loss recorded by Bank A under the debt restructuring agreement. GAAP did not address debtor accounting because the FASB was concerned that expansion of the scope of its pronouncement would selay issuance of GAAP for the Creditor.

b)
No, there is no gain under the modified terms because the total future cash flows after restructring exceed the total pre-restructring carrying amount of the note (principal).
The total future cash flows after restructing would be 2828800 (2176000+(2176000*10%*3)) and the total pre restructing carrying amount of note is 2720000

c)

The interest payment schedule is prepared below:

Company B Interest payment Schedule After Restructuring Effective Interest Rate - 1.4276%
Date	Cash Paid (10%)	Interest Expense (1.4276%)	Reducing Carrying Amount	carrying Amount of Note
12/31/2020				2720000
12/31/2021	217600	38831	178769	2541231
12/31/2022	217600	36279	181321	2359910
12/31/2023	217600	33690	183910	2176000
Total	652800	108800	544000

d)

The interest payment entry for Company B on December 31 2022 is given below:

Date	Particulars	Debit ($)	Credit ($)
Dec 31, 2022	Notes payable	181321
	Interest expense	36279
	Cash		217600
	(To record interest and principal payment)

e)

The journal entry that will be recorded by Company B on January 1 2024 is given below:

Date	Particulars	Debit ($)	Credit ($)
Jan 1, 2024	Notes payable	2176000
	Cash		2176000
	(To record principal payment)