Question

In: Accounting

Daniel Perkins is the sole shareholder of Pearl Inc., which is currently under protection of the...

Daniel Perkins is the sole shareholder of Pearl Inc., which is currently under protection of the U.S. bankruptcy court. As a “debtor in possession,” he has negotiated the following revised loan agreement with United Bank. Pearl Inc.’s $665,000, 11%, 10-year note was refinanced with a $665,000, 6%, 10-year note.

a) What is the accounting nature of this transaction? b) Prepare the journal entry to record this refinancing: c)On the books of Pearl Inc d)On the books of United Bank.

Solutions

Expert Solution

A. Accounting nature of transaction = Extinguishment of debt

B. Their will be no entry on the books of Pearl Inc.

C. Note amount before refinancing = 665000

    PV of 665000 due in 10years @ 11 % = 665000 * PV factor @ 11%, n = 10 years

                                                                          = 665000 * 0.3522 = 234213

    PV of annual interest payable on note = (665000 * .06) * PV of annuity @ 11% for 10 years

                                                                              = 39900 * 5.88923

                                                                               = 234980.28

Credit loss after refinance = 665000 – 234213 - 234980.28

                                                 = 195806.7

Journal entry

Bad debt Expense Dr     - 195806.7

Allowance for doubtful debt Cr - 195806.7

-----------------------------------------------------------------------------------------------------------------

Hope this answer your query.

Feel free to comment if you need further assistance. J

ekkarill92 answered 2 years ago
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