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Chapter 14: Q24E (page 759)

(Term Modification with Gain鈥擠ebtor鈥檚 Entries) Use the same information as in E14-22 above except that American Bank reduced the principal to \(1,900,000 rather than \)2,400,000. On January 1, 2021, Barkley pays $1,900,000 in cash to American Bank for the principal. Instructions

(a) Can Barkley Company record a gain under this term modification? If yes, compute the gain for Barkley Company.

(b) Prepare the journal entries to record the gain on Barkley鈥檚 books.

(c) What interest rate should Barkley use to compute its interest expense in future periods? Will your answer be the same as in E14-22 above? Why or why not?

(d) Prepare the interest payment schedule of the note for Barkley Company after the debt restructuring.

(e) Prepare the interest payment entries for Barkley Company on December 31, of 2018, 2019, and 2020.

(f) What entry should Barkley make on January 1, 2021?

Short Answer

Expert verified

(a) The gain on restructuring is to be recorded on the income statement of the business entity.

(b) Gain on restructuring totals$530,000.

(c) Future interest rate will be 0%.

(d) In the interest payment schedule, the previous carrying amount is brought down to the carrying amount after restructuring by reducing the payment made each year.

(e) Interest payment journal entry will include debit of note payable and credit to cash for each year.

(f) Journal entry made on 1 January 2021 will include a debit of$1,900,000.

Step by step solution

01

Definition of Bonds Payable

Bonds payable can be defined as the security issued by the business entity for generating cash for the business entity. These securities are debt securities.

02

(a) Recording gain under term modification

The business entity can record gains generated under term modification. The gain will be calculated as follow:

Particular

Amount $

Principal

$1,900,000

Less: Interest($1,900,000脳10%脳3years)

570,000

Total future value of cash flow after restructuring

$2,470,000

Less: carrying amount before restructuring

(3,000,000)

Gain on restructuring

$530,000

03

(b) Journal entry to record the gain

Date

Accounts and Explanation

Debit ($)

Credit ($)

Note payable

530,000

Gain on restructuring

530,000

04

(c) Future interest rate

Since the new carrying value of the note is the same as the sum of future cash flows without discounting, therefore imputed interest rate will be 0%. Therefore, all the future cash flows will reduce the principal balance, and interest expenses will not be recognized.

05

(d) Interest payment schedule after debt restructuring

Date

Cash paid

($1,900,000脳10%)

Interest expenses

Reduction of carrying amount

Carrying amount of note

31 Dec 2017

$2,470,000

31 Dec 2018

$190,000

$0

$190,000

2,280,000

31 Dec 2019

$190,000

0

190,000

2,090,000

31 Dec 2020

$190,000

0

190,000

1,900,000

Total

$570,000

$0

$570,000

06

(e) Journal entries for interest payments

Date

Accounts and Explanation

Debit ($)

Credit ($)

31 Dec 2018

Note payable

190,000

Cash

190,000

31 Dec 2019

Note payable

190,000

Cash

190,000

31 Dec 2020

Note payable

190,000

Cash

190,000

07

(f) Journal entry on 1 January 2021

Date

Accounts and Explanation

Debit ($)

Credit ($)

1 Jan 2021

Note payable

1,900,000

Cash

1,900,000

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Most popular questions from this chapter

Samson Corporation issued a 4-year, \(75,000, zero-interest-bearing note to Brown Company on January 1, 2017, and received cash of \)47,664. The implicit interest rate is 12%. Prepare Samson鈥檚 journal entries for (a) the January 1 issuance and (b) the December 31 recognition of interest.

Question: Under what circumstances would a transaction be recorded as a troubled-debt restructuring by only one of the two parties to the transaction?

E14-15 (L01,2) (Entries for Redemption and Issuance of Bonds) Jason Day Company had bonds outstanding with a maturity value of \(300,000. On April 30, 2017, when these bonds had an unamortized discount of \)10,000, they were called in at 104. To pay for these bonds, Day had issued other bonds a month earlier bearing a lower interest rate. The newly issued bonds had a life of 10 years. The new bonds were issued at 103 (face value $300,000).

Instructions

Ignoring interest, compute the gain or loss, and record this refunding transaction. (AICPA adapted)

(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.

Matt Ryan Corporation is interested in building its own soda can manufacturing plant adjacent to its existing plant in Partyville, Kansas. The objective would be to ensure a steady supply of cans at a stable price and to minimize transportation costs. However, the company has been experiencing some financial problems and has been reluctant to borrow any additional cash to fund the project. The company is not concerned with the cash flow problems of making payments, but rather with the impact of adding additional long-term debt to its balance sheet.

The president of Ryan, Andy Newlin, approached the president of the Aluminum Can Company (ACC), its major supplier, to see if some agreement could be reached. ACC was anxious to work out an arrangement, since it seemed inevitable that Ryan would begin its own can production. The Aluminum Can Company could not afford to lose the account.

After some discussion, a two-part plan was worked out. First, ACC was to construct the plant on Ryan鈥檚 land adjacent to the existing plant. Second, Ryan would sign a 20-year purchase agreement. Under the purchase agreement, Ryan would express its intention to buy all of its cans from ACC, paying a unit price which at normal capacity would cover labor and material, an operating management fee, and the debt service requirements on the plant. The expected unit price, if transportation costs are taken into consideration, is lower than current market. If Ryan did not take enough production in any one year and if the excess cans could not be sold at a high enough price on the open market, Ryan agrees to make up any cash shortfall so that ACC could make the payments on its debt. The bank will be willing to make a 20-year loan for the plant, taking the plant and the purchase agreement as collateral. At the end of 20 years, the plant is to become the property of Ryan.

Instructions

  1. What are project financing arrangements using special-purpose entities?
  2. What are take-or-pay contracts?
  3. Should Ryan record the plant as an asset together with the related obligation?
  4. If not, should Ryan record an asset relating to the future commitment?
  5. What is meant by off-balance-sheet financing?
See all solutions

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