On December 31, 2017, Federal Bank enters into a debt restructuring agreement wi

Question

On December 31, 2017, Federal Bank enters into a debt restructuring agreement with Carson Company which is experiencing financial difficulties. The bank restructures a $6,000,000 note receivable by:

Reducing the principal obligation from $6,000,000 to $5,000,000.

Extending the maturity date from 12/31/17 to 12/31/20, and

Reducing the interest rate from 12% to 6%.

Interest has been paid up to date as of 12/31/17.

Instructions

Discuss the nature of this transaction, indicating whether any gain or loss is recognized by either party and preparing any 12/31/17 journal entries that may be required by the debtor (Carson).

Explanation / Answer

Journal Entries:-

1.) 12% Debt/Laon A/c Dr. $1,000,000 ($6,000,000-$5,000,000)

               To Capital Reconstruction (Gain) A/c $1,000,000

2.) 12% Debt/Laon A/c Dr. $5,000,000 ($6,000,000-$1,000,000)

               To 6% Debt/Laon A/c $5,000,000

3.) Interest on Debt/Loan A/c Dr. $7,20,000 ($6,000,000*12%)

               To Bank A/c                          $7,20,000

Note :- From Next Year Interest will be charged @ 6% on $5,000,000. Gain of $1,000,000 to Carson will be Loss to Federal Bank.

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