Question

On December 31, 2017, American Bank enters into a debt restructuring agreement with Stellar Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $4,000,000 note receivable by the following modifications:

1.		Reducing the principal obligation from $4,000,000 to $3,200,000.
2.		Extending the maturity date from December 31, 2017, to January 1, 2021.
3.		Reducing the interest rate from 12% to 10%.

Assuming that the interest rate Stellar should use to compute interest expense in future periods is 1.4276%, prepare the interest payment schedule of the note for Stellar Company after the debt restructuring. (Round answers to 0 decimal places, e.g. 38,548.)

Prepare the interest payment entry for Stellar Company on December 31, 2019. (Round answers to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

What entry should Stellar make on January 1, 2021? (Round answers to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Answer 1

1
	Stellar Company
	Interest Payment Schedule After Restructuring
	Effective Interest Rate - 1.4276%
	Date	Cash Paid	Interest Expense	Reduction of Carrying Amount	Carrying Amount of Note
	December 31, 2018				$4,000,000
	December 31, 2019	$320,000	$57,104	$262,896	$3,737,104
	December 31, 2020	$320,000	$53,351	$266,649	$3,470,455
	December 31, 2021	$320,000	$49,545	$270,455	$3,200,000
	Total	$960,000	$160,000	$800,000
2
Date	Accounts Titles and Explanation	Debit	Credit
Dec 31, 2019	Notes Payable	$266,649
	Interest expenses	$53,351
	Cash		$320,000
	(To record interest and principle payment)
3
Date	Accounts Titles and Explanation	Debit	Credit
Jan 01, 2021	Notes Payable	$3,200,000
	Cash		$3,200,000
	(To record principle payment)