Question

On December 31, 2020, Green Bank enters into a debt restructuring agreement with Kingbird Inc., which is now experiencing financial trouble. The bank agrees to restructure a $1.1-million, 12% note receivable issued at par by the following modifications:

1.Reducing the principal obligation from $1.1 million to $0.88 million
2.Extending the maturity date from December 31, 2020, to December 31, 2023
3.Reducing the interest rate from 12% to 10%

Kingbird pays interest at the end of each year. On January 1, 2024, Kingbird Inc. pays $0.88 million in cash to Green Bank for the principal. The market rate is currently 10%.

Click here to view the factor table PRESENT VALUE OF 1.
Click here to view the factor table PRESENT VALUE OF AN ANNUITY OF 1.

Using (1) factor tables, (2) a financial calculator, or (3) Excel function PV, determine if Kingbird can record a gain under this term modification.

select an option

Calculate the gain if any. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and Round final answer to 0 decimal places, e.g. 1,525.)

Gain$enter the Gain in dollars rounded to 0 decimal places

Prepare the journal entries to record the gain (if any) on Kingbird’s books. (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.)

Account Titles and Explanation

Debit

Credit

enter an account title

enter a debit amount

enter a credit amount

enter an account title

enter a debit amount

enter a credit amount

enter an account title

enter a debit amount

enter a credit amount

What interest rate should Kingbird use to calculate its interest expense in future periods?

Rate of intrest appliedenter Rate of intrest applied in percentages

%

Prepare the amortization schedule of the note for Kingbird after the debt restructuring.

KINGBIRD INC.
INTEREST PAYMENT SCHEDULE AFTER DEBT
RESTRUCTURING
EFFECTIVE INTEREST RATE
Date Cash
Interest Effective
Interest Reduction of
Carrying
Amount Carrying
Amount
of Note

12/31/20

       $enter a dollar amount

12/31/21

$enter a dollar amount

$enter a dollar amount

$enter a dollar amount

enter a dollar amount

12/31/22

enter a dollar amount

enter a dollar amount

enter a dollar amount

enter a dollar amount

12/31/23

enter a dollar amount

enter a dollar amount

enter a dollar amount

enter a dollar amount

Total

$enter a total amount

$enter a total amount

    

Prepare the interest payment entry for Kingbird on December 31, 2021, 2022, and 2023. (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.)

Date

Account Titles and Explanation

Debit

Credit

Dec. 31, 2021 through 2023

enter an account title for the journal entry on December 31

enter a debit amount

enter a credit amount

enter an account title for the journal entry on December 31

enter a debit amount

enter a credit amount

What entry should Kingbird make on January 1, 2024? (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.)

Date

Account Titles and Explanation

Debit

Credit

January 1, 2024

enter an account title

enter a debit amount

enter a credit amount

enter an account title

enter a debit amount

enter a credit amount

Answer 1

Answer-1:

No, Kingbird can not record a gain under this term modification.

Answer-2:

Gain = $0

Answer-3:

No Entry required for the gain

Answer-4:

Interest rate used to calculate interest expense in future periods = 1.4276%

Answer-5:

Total future cash flow after restructuring :
Principal	$   8,80,000
Interest (880,000 * 10%)*3	2,64,000
Total future cash flow after restructuring :	11,44,000
Total pre-restructuring carrying amount of note	$ 11,00,000

Amortization Table
Date	Cash paid	Interest expense	Reduction of carrying amount	Carrying amount of note
12/31/2020				$ 11,00,000
12/31/2021	$        88,000	$       15,704	$      72,296	10,27,704
12/31/2022	88,000	14,671	73,329	9,54,375
12/31/2023	88,000	13,625	74,375	8,80,000

Answer-6:

Date	Account Title	Debit	Credit
12/31/2021	Notes payable	$       72,296
	Interest expense	15,704
	Cash		$        88,000
12/31/2022	Notes payable	$       73,329
	Interest expense	14,671
	Cash		$        88,000
12/31/2023	Notes payable	$       74,375
	Interest expense	13,625
	Cash		$        88,000

Answer-7:

Date	Account Title	Debit	Credit
01-01-2024	Notes payable	$   8,80,000
	Cash		$    8,80,000