Question

Question: On December 31, 2019, Sterling Bank enters into a debt restructuring agreement with Barkley plc, ...

On December 31, 2019, Sterling Bank enters into a debt restructuring agreement with Barkley plc, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $3,000,000 note receivable by the following modifications

1. Reducing the principal amount from $3,000,000 to 2,400,000.

2. Extending the maturity date from December 31, 2019, to January 1, 2023.

3. Reducing the interest rate from 12% to 10%. Barkley's market rate of interest is 15%

Barkley pays interest at the end of each year. On January 1, 2023, Barkley's market rate of interest is 15%

A. Can Barkley record a gain under the term modification mentioned above? explain

B. Prepare the amortization schedule of the note for Barkley after the debt modification?

C. Prepare the interest payment entry for Barkley on December 31, 2021?

D. What entry should Barkley make on January 1, 2023

Answer 1

a. No, Gain will be recorded by Barkly under the term of modification mentioned above because total Future Cash flow after restructuring exceed the total Pre-restructuring carrying amount of the note . Future Cash Flow afteer Restruccturing 3120000 (2400000+(2400000*10%*3)) Pre-Restructuring Carrying Amount 3000000 Excess 120000 b. Interest Payment Schedule After Restructuring Date Cash Paid (10%) Interest Expense (1.4276%) Reduction of Carying Amount Carying Amount of Note 31-12-2019 3000000 31-12-2020 $2,40,000 $42,828 $1,97,172 $28,02,828 31-12-2021 $2,40,000 $40,013 $1,99,987 $26,02,841 31-12-2022 $2,40,000 $37,158 $2,02,842 $23,99,999 Total $7,20,000 $1,19,999 $6,00,001 c. Journal Entry Date Account Tittle & Explanatio Debit Credit 31-Dec Notes Payable $1,97,172 Interets Expense $42,828 Cash $2,40,000 TO Record Interets and Repayment of Principal cd Journal Entry Date Account Tittle & Explanatio Debit Credit 01-Jan Notes Payable $2,40,000 Cash $2,40,000 TO Record Repayment of Principal