Question

On January 2, 2011 Stevens, Inc. was indebted to First Bank under a $12 million, 10% unsecured note. The note was signed January 2, 2005, and was due December 31, 2014. Annual interest was last paid on December 31, 2009. Stevens negotiated a restructuring of the terms of the debt agreement due to financial difficulties.

Required:

Prepare all journal entries for Stevens, Inc. to record the restructuring and any remaining transactions relating to the debt under each independent assumption.

a. First Bank agreed to settle the debt in exchange for land which cost Stevens $8,500,000 and has a fair market value of $10,000,000.

b. First Bank agreed to (1) forgive the accrued interest from last year (2) reduce the remaining four interest payments to $600,000 each, and (3) reduce the principal to $9,000,000.

Answer 1

a.

In books of Steven Inc.
January 2, 2011
		Debit	Credit
Asset Account	$	1500000
Gain on asset account			1500000
( Land written up by $ 1500,000 being difference between carrying value and fair value)
Notes Payable	$	12,000,000
Interest payable		1,200,000
Land			10,000,000
Gain on Debt settlement			3,200,000
( Notes Payable settled by transfer on Land)

When total cash outflows expected under the restructured debt are less than the carrying amount of the debt prior to the restructuring and there are no contingent payments, a gain on restructuring is recognized and an adjustment is made to the carrying amount of the debt. The amount of the gain and the net adjustment to the carrying amount of the debt recognized by Borrower is $1800,000 (carrying amount of debt prior to restructuring [$13.20 million] less total cash outflows required under the terms of the restructured debt [$11.4 million]). Going forward, no interest expense is recorded on the debt and payments of interest are reflected as a reduction of the debt’s carrying amount

The following is the journal entry recorded on the date the debt is restructured (January, 2011):

		Debit	Credit
Interest Payable	$	1,200,000
Loan Payable	$	12,000,000
Loan Payable	$		11,400,000
Gain on debt Restructuring	$		1,800,000