On December 31, 2011, Short Co. is in financial difficulty and cannot pay a note

Question

On December 31, 2011, Short Co. is in financial difficulty and cannot pay a note due that day. It is a $750,000 note with $75,000 accrued interest payable to Bryan, Inc. Bryan agrees to forgive the accrued interest, and extend the maturity date to December 31, 2013, and reduce the interest rate to 4%. The present value of restructured cash flows is $642,000. Prepare enteries for the following: A) The restructure on Short's books. B) The payment of interest on December 31, 2012. C) The restructure on Bryan's books.

Explanation / Answer

A

Interest payable

$75,000

Notes payable

($750,000*4%*2)

$60,000

Gain on restructuring of debt

$15,000

B

Note payable

($750,000*4%)

$30,000

Cash

$30,000

C

Allowance for doubtful accounts

$138,000

Notes receivable

($750,000 - $642,000)

$108,000

Interest receivable

($750,000*4%)

$30,000

A

Interest payable

$75,000

Notes payable

($750,000*4%*2)

$60,000

Gain on restructuring of debt

$15,000

B

Note payable

($750,000*4%)

$30,000

Cash

$30,000

C

Allowance for doubtful accounts

$138,000

Notes receivable

($750,000 - $642,000)

$108,000

Interest receivable

($750,000*4%)

$30,000

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