4.Troubled debt A Company E has an unpaid note for $60,000 on January 1, 2011. T
ID: 2570668 • Letter: 4
Question
4.Troubled debt A Company E has an unpaid note for $60,000 on January 1, 2011. The note was written at 9% annual interest. There is also accrued unpaid interest of $6,000. Company E transfers a piece of land to the bank in partial satisfaction of the note. The land has a cost of $16,000 and a market value of $18,000. The bank reduces the loan by the value of the land and agrees to forgive the accrued interest. The bank then requires four annual future payments of $13,500, due each December 31, starting on December 31, 2011.Explanation / Answer
For the debtor:
Entries as on January 01,2011:
Note payable Account DR 18000
Accrued Interest DR 6000
Land CR 18000
Abnormal gain CR 6000
Note: It is assumed that land has been revalued by debtor before transferring to bank
Restrucured loan amount = 60000 - 18000 = 42000
Interest for 1 year on restructured loan = 42000*11% = 4620 (Calculation of 11% is shown below)
Journal entry as on December 31,2011:
Note payable DR 8880 (13500 - 4620)
Interest expense DR 4620
Bank CR 13500
For the bank:
To prepare amortisation table, we need to find interest rate charged by bank on restructured loan.
Outflow = Inflow
42000 = 13500*present value annuity factor(r,4)
42000/13500 = present value annuity factor(r,4)
3.1111 = present value annuity factor(r,4)
r = 11% (approx)
Preparation of Amortisation table:
Year Opening Interest Payment Closing
1 42000 42000*11% = 4620 13500 33120
2 33120 3643.20 13500 23263.20
3 23263.20 2559 13500 12322.20
4 12322.20 1177.80 13500 0
Entries as on January 01,2011:
Land DR 18000
Abnormal loss DR 6000
Accrued Interest CR 6000
Note receivable CR 18000
Journal entry as on December 31,2011:
Bank DR 13500
Note receivable CR 8880 (13500 - 4620)
Interest income CR 4620
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