Question

Exercise 14-23 On December 31, 2017, the Indigo 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, $3,700,000 note receivable by the following modifications: 1. Reducing the principal obligation from $3,700,000 to $2,960,000. 2. Extending the maturity date from December 31, 2017, to January 1, 2021. 3. Reducing the interest rate from 12% to 10%. Barkley pays interest at the end of each year. On January 1, 2021, Barkley Company pays $2,960,000 in cash to Indigo Bank. Answer the following questions related to Indigo Bank (creditor). What interest rate should Indigo Bank use to calculate the loss on the debt restructuring? (Round answer to 0 decimal places, e.g. 18%.) Interest rate % (1) Compute the loss that Indigo 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, 2017 Prepare the interest receipt schedule for Indigo Bank after the debt restructuring. (Round answers to 0 decimal places, e.g. 38,548.) INDIGO BANK Interest Receipt Schedule After Debt Restructuring Effective-Interest Rate Date Cash Received Interest Revenue Increase in Carrying Amount Carrying Amount of Note 12/31/17 $ $ $ $ 12/31/18 12/31/19 12/31/20 Total $ $ $ Prepare the interest receipt entry for Indigo Bank 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 What entry should Indigo Bank 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 Click if you would like to Show Work for this question: Open Show Work

Answer 1

Indigo Bank What interest rate should Indigo Bank use to calculate the loss on the debt restructuring? The Indigo Bank should use the historical interest rate of 12% to calculate the loss. (1) Compute the loss that Indigo Bank will suffer from the debt restructuring The loss is computed as follows: Pre-restructuring carrying amount of note Less: Present value of restructured future cash flows: Present value of principal $2,960,000 due in 3 years at 12%" Present value of interest $240,000 paid annually for 3 years at 12% Loss on debt restructuring 3700000 2106869 710942 2817811 882189 $2,960,000.71178 $2,106,869 $296,000 2.40183 $710,942 Prepare the journal entry to record the loss. 31.12.2017 Bad Debt Expense a/c 882189 To Allowance for Doubtful Accounts 882189 Prepare the interest receipt schedule for Indigo Bank after the debt restructuring Interest Payment Schedule After Debt Restructuring Cash recd. Interest 10%. Interest Carrying . Amt. venue @ 12% Carrying amt Date 31.12.2017 31.12.2018 296000 31.12.2019 296000 31.12.2020 296000 2817811 2859948 2907142 2960000 338137 343194 348858 42137 47194 52858 Prepare the interest receipt entry for Indigo Bank on December 31, 2019 31.12.2019 Cash ac 296000 Allowance for Doubtful Accts a/c Dr 42137 To Interest Revenue 338137 What entry should Indigo Bank make on January 1, 2021? 31.12.2019 Cash ac 2960000 Allowance for Doubtful Accts a/c Dr 740000 To Note Receivable 3700000