Question

Tamarisk Corp. owes $251,000 to Vaughn Trust. The debt is a 10-year, 12% note due December 31, 2017. Because Tamarisk Corp. is in financial trouble, Vaughn Trust agrees to extend the maturity date to December 31, 2019, reduce the principal to $204,000, and reduce the interest rate to 7%, payable annually on December 31.

(a)		Prepare the journal entries on Tamarisk’s books on December 31, 2017, 2018, 2019.
(b)		Prepare the journal entries on Vaughn Trust’s books on December 31, 2017, 2018, 2019.

Answer 1

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a. Tamarisk Books
Year	Account	Debit	Credit
Year 2017	Note Payable	$     18,440
	Gain on Restructuring		$    18,440
	$251,000-$204,000-($204,000*7%*2)
Year 2018	Note Payable (204,000*7%)	$     14,280
	Cash		$    14,280
Year 2019	Note Payable $204,000+($204,000*7%)	$   218,280
	Cash		$ 218,280
b. Vaughn Trust
Year 2017	Bad Debt Expense	$     64,239
	Allowance for doubtful accounts		$    64,239
	Pre-restructuring carrying amount		$ 251,000
	Present value of $204,000,12%,2 Years	$   162,627
	$204,000*0.79719
	Present value of $14,280,12%,2 Years	$     24,134
	$14,280*1.69005
			$-186,761
	Loss		$    64,239
Amortization:
Date	Cash Interest	Eff Int 12%	Increase	Carrying amount
Dec 31 2017				$            186,761
Dec 31 2018	$                                                       14,280	$     22,411	$      8,131	$            194,892
Dec 31 2019	$                                                       14,280	$     23,387	$      9,108	$            204,000
Year 2018	Cash	$     14,280
	Allowance for doubtful accounts	$        8,131
	Interest Revenue		$    22,411
Year 2019	Cash	$     14,280
	Allowance for doubtful accounts	$        9,108
	Interest Revenue		$    23,388