Question

Sarasota Corp. owes Ivanhoe Corp. a 10-year, 10% note in the amount of $349,800 plus $34,980 of accrued interest. The hote is due today, December 31, 2020. Because Sarasota Corp. is in financial trouble, Ivanhoe Corp. agrees to forgive the accrued interest $31,800 of the principal, and to extend the maturity date to December 31, 2023. Interest at 10% of revised principal will continue to be due on 12/31 each year. Assume the following present value factors for 3 periods. Single sum Ordinary annuity of 1 21/% 0.93543 2.86989 23/8% 0.93201 2.86295 21/2% 0.92859 2.85602 2378% 0.92521 2.84913 23/% 0.92184 2.84226 3% 0.91514 2.82861 Click here to view factor tables. Compute the new effective-interest rate for Sarasota Corp. following restructure. (Hint: Find the interest rate that establishes approximately $384,780 as the present value of the total future cash flows.) (Round effective interest rate to 3 decimal places, eg. 4.657%.) Effective interest rate % e Textbook and Media List of Accounts Prepare a schedule of debt reduction and interest expense for the years 2020 through 2023. (Round answers to decimal places, eg.38,548.)

Answer 1

The PV factors at various interest rates have been provided. The effective interest rate shall be such rate at which the PV of future cash flows from the note is equal to $ 384,780 (349800+34980) Considering trial and error method, the interest rate at 2 5/8 % is firstly tried. Amount PV factor at 2.625% 0.92521 2.84913 Single Sum Annuity (349800-31800) $ (318000*10%) $ 318,000 31,800 Discounted Amount $ 294,217 $ 90,602 $ 384,819 At rate of 2.625%, the PV of future cash flows is approximately equal to $ 384,780 Hence, the effective rate of interest shall be 2.625%. Cash Paid 20 21 Interest Premium Carrying Amount expense Amortized of Note $ 384,780 10,100 $ 21,700$ 363,080 9,531 $ 22,269 $ 340,811 8,989 $ 22,811 $ 318,000 $ $ 22 31,800 $ 31,800 $ 31,800 $ 318,000 $ $ $ 23 23 (34980+31800) $ 66,780 The Loss for Ivanhoe Corporation is (Amount of interest and principal foregone) Credit In the books of Sarasota Corp. Date Account Titles and Explanations 31-Dec-20 Note Payable $ Interest Payable $ Premium on Notes (To record premium due on notes) Debit 34,980 31,800 $ 66,780 31-Dec-21 Interest expense $ 10,100 Premium on Notes $ 21,700 Cash $ (To record payment of interest and premium amortization) 31,800 31-Dec-22 Interest expense $ 9,531 Premium on Notes $ 22,269 Cash $ (To record payment of interest and premium amortization) 31,800

Formulas used

A B с D E F G 1 2 3 4 5 The PV factors at various inter The effective interest rate sha from the note is equal to $ 384 6 7 Considering trial and error me Amount PV factor at 2.625% Discounted Amount 8 9 Single Sum Annuity (349800-31800) (318000*10%) =(349800-31800) =( 318000*10%) 0.92521 2.84913 10 11 =ROUND(D9*E9,0) =ROUND(D10*E10,0) =SUM(F9:F10) 12 13 At rate of 2.625%, the PV of fu Hence, the effective rate of in 14 15 Cash Paid Interest expense Premium Amortized 16 17 20 Carrying Amount of Note 384780 =F17-E18 =F18-E19 =F19-E20 18 21 22 31800 31800 31800 318000 =ROUND(F17*2.625%,0) =C18-018 =ROUND(F18*2.625%,0) =C19-019 =ROUND(F19*2.625%,0)+43 =C20-D20 0 23 23 =F20-C21 19 20 21 22 23 24 (34980+31800) = (34980+31800) The Loss for Ivanhoe Corporat (Amount of interest and princ 25 26 Debit Credit 27 28 In the books of Sarasota Corp. Date Account Titles and Explanations 44196 Note Payable Interest Payable Premium on Notes (To record premium due on notes) 34980 31800 29 30 I=E28+E29 31 32 33 44561 10100 21700 34 35 Interest expense Premium on Notes Cash (To record payment of interest and pr =E33+E34 36 37 38 44926 9531 22269 39 40 Interest expense Premium on Notes Cash (To record payment of interest and pr 1=E38+E39 41 42 43 44