On December 31, 2003, the Elected Bank enters into a debt restructuring agreemen

Question

On December 31, 2003, the Elected Bank enters into a debt restructuring agreement with Donkey Company, which is now experiencing financial trouble. The bank agrees to restructure a 10%, issued at par, $1,000,000 note receivable by the following modifications:

1. Reducing the principal obligation to $800,000

2. Extending the maturity date to 12/31/05

3. Reducing the interest rate to 6%

Prepare all entries from 12-31-03 to 12-31-05 for both parties (debtor and creditor), and explain the interest rate assumed by the debtor and creditor after the restructuring. Show all your work.

Explanation / Answer

Solution.

3. INterest payment entry for 2004,2005.

Notes payable account debit 48,000

Cash account credited $48,000

4. Calculation for creditore loss of restructuring.

5. Interest receipt shedule for Bank after restructuring.

2004

Cash account debited $48,000

Allowance for Doubtful Accounts debited $26,384

Interest Revenue Accounts credited $74,384

2005

Cash account debited $48,000

Allowance for Doubtful Accounts debited $29,022.40

Interest Revenue Accounts credited $77,022.40

Jan 1, 2006

Cash acvcount debited $800,000

Allowance for Doubtful Accounts debited $200,000

Notes Receivable account credited $10,000

Total future cash flow after restructuring Principle                          800,000 Interest (800,000 x 6% x 2)                            96,000 Total                          896,000 Totalpre restructuring carrying amount Principle                      1,000,000 Gain ( 1,000,000 - 944,000)                          104,000 31-12-2003 Debit Credit Note payable                          104,000 Gain on debt Restructuring 104000

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