Question

Rothschild Chair Company, Inc., was indebted to First Lincoln Bank under a $20 million, 10% unsecured note. The note was signed January 1, 2008, and was due December 31, 2021. Annual interest was last paid on December 31, 2016. At January 1, 2018, Rothschild Chair Company was experiencing severe financial difficulties and negotiated a restructuring of the terms of the debt agreement. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
Prepare all journal entries by First Lincoln Bank to record the restructuring and any remaining transactions, for current and future years, relating to the debt under each of the independent circumstances below:

1. First Lincoln Bank agreed to settle the debt in exchange for land having a fair value of $16 million but carried on Rothschild Chair Company’s books at $13 million.
2. First Lincoln Bank agreed to (a) forgive the interest accrued from last year, (b) reduce the remaining four interest payments to $1 million each, and (c) reduce the principal to $15 million.
3. First Lincoln Bank agreed to defer all payments (including accrued interest) until the maturity date and accept $27,775,000 at that time in settlement of the debt.

Answer 1

Solution:

PART-1
	Land	16,000,000
	Loss on troubled debt restructuring	6,000,000
	Note receivable		20,000,000
	Accrued interest receivable		2,000,000
PART-2
Jan-01	Loss on troubled debt restructuring	8,584,980
	Accrued interest receivable		2,000,000
	Note receivable		6,584,980
Dec-31	Cash	1,000,000
	Note receivable	341,502
	Interest revenue		1,341,502
Dec-31	Cash	1,000,000
	Note receivable	375,652
	Interest revenue		1,375,652
Dec-31	Cash	1,000,000
	Note receivable	413,217
	Interest revenue		1,413,217
Dec-31	Cash	1,000,000
	Note receivable	454,609
	Interest revenue		1,454,609
PART-3
Jan-01	Loss on troubled debt restructuring	3,029,397
	Accrued interest receivable		200,000
	Note receivable		1,029,397
Dec-31	Note receivable	1,897,060
	Interest revenue		1,897,060
Dec-31	Note receivable	2,086,766
	Interest revenue		2,086,766
Dec-31	Note receivable	2,295,443
	Interest revenue		2,295,443
Dec-31	Note receivable	2,525,128
	Interest revenue		2,525,128

Working:

Previous Value:
Accrued interest (10%*20,000,000)	2,000,000
Principal	20,000,000
Carrying amount	22,000,000
Minus
Interest 1 million * 3.1697	3,169,870
Principal 15 million * 0.68301	10,245,150
PV of receivable	13,415,020
LOSS	8,584,980

Previous Value:
Accrued interest (10%*20,000,000)	2,000,000
Principal	20,000,000
Carrying amount	22,000,000
Minus
New value: $27,775,000 * 0.68301	18,970,603
LOSS	3,029,397