On December 31, 2012, the American Bank enters into a debt restructuring agreeme

Question

On December 31, 2012, the American Bank enters into a debt restructuring agreement with Barkley Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $3,000,000 note receivable by the following modifications: 1. Reducing the principal obligation from $3,000,000 to $2,400,000. 2. Extending the maturity date from December 31, 2012, to January 1, 2016. 3. Reducing the interest rate from 12% to 10%. Barkley pays interest at the end of each year. On January 1, 2016, Barkley Company pays $2,400,000 in cash to Firstar Bank. Answer the following questions related to American Bank (creditor).

(e) What entry should American Bank make on January 1, 2016?

cash _____________ _____________

allowance for doubtful accounts _____________ ____________

notes receivable_______________ ____________________

Explanation / Answer

Jan1,2016 Dr Cr

Cash $2400000

Allowance for Doubtful debt $600000

Note Receivable $3000000

( As the original amount was $300000 and it was reduced to $2400000 thereby the allowance was created which is nbow debited)

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