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Chapter 14: 14-27Q_a (page 753)
(a) In a troubled-debt situation, why might the creditor grant concessions to the debtor?
The creditor will allow concessions in a troubling situation as it seems to be a more reasonable method for boosting investment recovery.
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Using the same information as in E14-22 and E14-24, answer the following questions related to American Bank (creditor).
Instructions
(Debtor/Creditor Entries for Continuation of Troubled Debt) Daniel Perkins is the sole shareholder of Perkins Inc., which is currently under protection of the U.S. bankruptcy court. As a 鈥渄ebtor in possession,鈥� he has negotiated the following revised loan agreement with United Bank. Perkins Inc.鈥檚 \(600,000, 12%, 10-year note was refinanced with a \)600,000, 5%, 10-year note.
Instructions
(a) What is the accounting nature of this transaction?
(b) Prepare the journal entry to record this refinancing:
(1) On the books of Perkins Inc.
(2) On the books of United Bank.
(c) Discuss whether generally accepted accounting principles provide the proper information useful to managers and investors in this situation.
E14-1 (L01) (Classification of Liabilities) Presented below are various account balances of K.D. Lang Inc.
(a) Unamortized premium on bonds payable, of which \(3,000 will be amortized during the next year.
(b) Bank loans payable of a winery, due March 10, 2021. (The product requires aging for 5 years before sale.)
(c) Serial bonds payable, \)1,000,000, of which \(200,000 are due each July 31.
(d) Amounts withheld from employees鈥� wages for income taxes.
(e) Notes payable due January 15, 2020.
(f) Credit balances in customers鈥� accounts arising from returns and allowances after collection in full of account.
(g) Bonds payable of \)2,000,000 maturing June 30, 2018.
(h) Overdraft of $1,000 in a bank account. (No other balances are carried at this bank.)
(i) Deposits made by customers who have ordered goods.
Instructions
Indicate whether each of the items above should be classified on December 31, 2017, as a current liability, a long-term liability, or under some other classification. Consider each one independently from all others; that is, do not assume that all of them relate to one particular business. If the classification of some of the items is doubtful, explain why in each case.
Question: (Restructure of Note under Different Circumstances) Halvor Corporation is having financial difficulty and therefore has asked Frontenac National Bank to restructure its \(5 million note outstanding. The present note has 3 years remaining and pays a current rate of interest of 10%. The present market rate for a loan of this nature is 12%. The note was issued at its face value.
Instructions
The following are four independent situations. Prepare the journal entry that Halvor and Frontenac National Bank would make for each of these restructurings.
(a) Frontenac National Bank agrees to take an equity interest in Halvor by accepting common stock valued at \)3,700,000 in exchange for relinquishing its claim on this note. The common stock has a par value of \(1,700,000.
(b) Frontenac National Bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book value of \)3,250,000 and a fair value of \(4,000,000.
(c) Frontenac National Bank agrees to modify the terms of the note, indicating that Halvor does not have to pay any interest on the note over the 3-year period.
(d) Frontenac National Bank agrees to reduce the principal balance due to \)4,166,667 and require interest only in the second and third year at a rate of 10%.
When is the stated interest rate of a debt instrument presumed to be fair?
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