Sandhill Corp. currently has an issued debenture outstanding with Abbra Bank. The note has a principal...

Sandhill Corp. currently has an issued debenture outstanding with Abbra Bank. The note has a principal of $4 million, was issued at face value, and interest is payable at 7%. The term of the debenture was 10 years, and was issued on December 31, 2010. The current market rate for this debenture is 9%. Sandhill Corp. has been experiencing financial difficulties and has asked Abbra Bank to restructure the note. Both Sandhill and Abbra Bank prepare financial statements in accordance with IFRS. It is currently December 31, 2017.

Abbra Bank agrees to modify the note by allowing Sandhill to not pay the interest on the note for the remaining period. Assume that the bank had not previously recognized any loss on impairment. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round discount factors to 6 decimals e.g. 0.527500 and final answers to 0 decimal places, e.g. 5,275.)

Expert Solution

Companies that face financial difficulties may ask the creditors to waive off some part of their claim so that the company balance sheet can be reconstructed and a better value of the business can be shown so that new investments can be gained from the prospective investors. If the company balance sheet is not in a good state then no new investor will invest in the company and to solve this type of situations companies indulge in the reconstruction.
Since Abbra bank has agreed to restructure the notes and allowed Sandhill to wave off the interest due on the remaining period this will have a loss of interest on the abbra bank and gain for the sandhill.

Below JE is required to be passed at the time when the notes are restructured.

Interest Payable 840000
To Interest waved off 840000

(4million*7%*3years)

In the books of abra, this will be a loss as they have allowed the sandhill to waive the interest that was remaining on the 3 years period.

Loss of interest 840000
To interest receivable 840000

ekkarill92 answered 2 years ago

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