Question

On December 31, 2017, American Bank enters into a debt restructuring agreement with Crane Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $2,300,000 note receivable by the following modifications: 1. Reducing the principal obligation from $2,300,000 to $1,840,000. 2. Extending the maturity date from December 31, 2017, to January 1, 2021. 3. Reducing the interest rate from 12% to 10%. Crane pays interest at the end of each year. On January 1, 2021, Crane Company pays $1,840,000 in cash to American Bank. Part 1 Correct answer icon Your answer is correct. Will the gain recorded by Crane be equal to the loss recorded by American Bank under the debt restructuring? eTextbook and Media List of Accounts Attempts: 1 of 15 used Part 2 Correct answer icon Your answer is correct. Can Crane Company record a gain under the term modification mentioned above? eTextbook and Media List of Accounts Attempts: 2 of 15 used Part 3 Assuming that the interest rate Crane should use to compute interest expense in future periods is 1.4276%, prepare the interest payment schedule of the note for Crane Company after the debt restructuring. (Round answers to 0 decimal places, e.g. 38,548.) CRANE COMPANY Interest Payment Schedule After Debt Restructuring Effective-Interest Rate Date Cash Paid Interest Expense Reduction of Carrying Amount Carrying Amount of Note 12/31/17 $ $ $ $ 12/31/18 12/31/19 12/31/20 Total $ $ $ eTextbook and Media List of Accounts Attempts: 0 of 15 used Save for LaterSubmit Answer Part 4 Prepare the interest payment entry for Crane Company 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 eTextbook and Media List of Accounts Attempts: 0 of 15 used Save for LaterSubmit Answer Part 5 What entry should Crane 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 eTextbook and Media List of Accounts

Answer 1

Part 1

NO.

The debtor is not addressed by GAAP, due to "accounting asymmetry" treatment. It was the concern of FASB that the scope expansion of its pronouncement would result into the delay in the issuance of GAAP for the creditor

Part 2

NO

Total future cash flows after restructuring > total pre-restructuring carrying of the note (principal).

Total future cash flows after restructuring
Principal	1840000
Interest ((1840000*10%)*3)	552000
Total	2392000
Total pre-restructuring carrying amount of note	2300000

Part 3

CRANE COMPANY

Interest Payment Schedule after Debt Restructuring

Effective-Interest Rate

date	Cash paid	Interest expense	Reduction of carrying amount	Carrying amount of note
12/31/17				2300000
12/31/18	184000	32835	151165	2148835
12/31/19	184000	30677	153323	1995512
12/31/20	184000	28488	155512	1840000

1840000*10% = 184000

Interest expense = previous year carrying amount of note * 1.4276%

Reduction of carrying amount = cash paid – interest expense

Carrying amount of note = previous year carrying amount of note – reduction of carrying amount

Part 4

Date	General journal	Debit	Credit
December 31, 2019	Notes payable	153323
	Interest expense	30677
	Cash		184000
	(to record the payment of interest)

Part 5

Date	General journal	Debit	Credit
January 1, 2021	Notes payable	1840000
	Cash		1840000
	(to record the repayment of notes payable)