Print Item 2 Item 2 10 points At January 1, 2018, Rothschild Chair Company, Inc.
ID: 2336729 • Letter: P
Question
Print Item 2 Item 2 10 points At January 1, 2018, Rothschild Chair Company, Inc., was indebted to First Lincoln Bank under a $31 million, 10% unsecured note. The note was signed January 1, 2015, and was due December 31, 2021. Annual interest was last paid on December 31, 2016. Rothschild Chair Company was experiencing severe financial difficulties and negotiated a restructuring of the terms of the debt agreement. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: Prepare all journal entries by Rothschild Chair Company, Inc., to record the restructuring and any remaining transactions relating to the debt under each of the independent circumstances below: 1. First Lincoln Bank agreed to settle the debt in exchange for land having a fair value of $27 million but carried on Rothschild Chair Company’s books at $22.9 million. 2. First Lincoln Bank agreed to (a) forgive the interest accrued from last year, (b) reduce the remaining four interest payments to $1 million each, and (c) reduce the principal to $24.9 million. 3. First Lincoln Bank agreed to defer all payments (including accrued interest) until the maturity date and accept $43,051,000 at that time in settlement of the debt.
Explanation / Answer
Answer:
1
First Lincoln Bank agreed to settle the debt in exchange for land having a fair value of $27 million but carried on Rothschild Chair Company’s books at $22.9 million.
Event
General Journal
Debit $
Credit $
1
Land (27-22.9)
4.1
Gain on disposal of assets
4.1
(to record the gain on disposal of assets )
2
Notes payable
31
Interest payable
3.1
Land
27
Gain on troubled debt restructuring
7.1
____________________________________________________________________---
2
First Lincoln Bank agreed to (a) forgive the interest accrued from last year, (b) reduce the remaining four interest payments to $1 million each, and (c) reduce the principal to $24.9 million
a)
No
Events
General Journal
Debit
Credit
1
a
Interest payable
3.1
Notes payable
2.1
Gain on troubled debt restructuring
5.2
2
b
Notes payable
1
Cash
1
3
c
Notes payable
24.9
Cash
24.9
2-b) Note:
No interest expense should be recorded after the restructuring. All subsequent cash payments result in reductions of principal.
_____________________________________________________________
3
First Lincoln Bank agreed to defer all payments (including accrued interest) until the maturity date and accept $43,051,000 at that time in settlement of the debt.
No
Date
General Journal
Debit
Credit
1
1-Jan-18
No journal entry required
2
31-Dec-18
Interest expense
2046000
Interest payable
2046000
3
31-Dec-19
Interest expense
2168760
Interest payable
2168760
4
31-Dec-20
Interest expense
2,298,886
Interest payable
2,298,886
5
31-Dec-21
Interest expense
2,437,354
Interest payable
2,437,354
6
31-Dec-21
Interest payable
12,051,000
Notes payable
31,000,000
Cash
43,051,000
Working notes for the above answer is as under
Analysis:
Book value: ($31,000,000 + $3,100,000
34,100,000
Future payments:
43,051,000
Interest
8,951,000
Calculation of the new effective interest rate
$34,100,000 ÷ $43,051,000 = 0.79208 – the PV of $1 value for n = 4, i = ?
In row 4 of PV of $1, the number 0.79208 is in the 6.00% column.
So, this is the new effective interest rate.
January 1, 2018
Since the total future cash payments are not less than the book value of the debt, no reduction of the existing debt is necessary and no entry is required at the time of the debt restructuring.
Interest payable ($3,100,000 + 4 years’ interest) = $12,051,000
Event
General Journal
Debit $
Credit $
1
Land (27-22.9)
4.1
Gain on disposal of assets
4.1
(to record the gain on disposal of assets )
2
Notes payable
31
Interest payable
3.1
Land
27
Gain on troubled debt restructuring
7.1
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