Question

On December 31, 2020, Tamarisk Bank enters into a debt restructuring agreement with Barkley Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $2,200,000 note receivable by the following modifications:

1.		Reducing the principal obligation from $2,200,000 to $1,440,000.
2.		Extending the maturity date from December 31, 2020, to January 1, 2024.
3.		Reducing the interest rate from 12% to 10%.

Barkley pays interest at the end of each year. On January 1, 2024, Barkley Company pays $1,440,000 in cash to Tamarisk Bank.

Answer the following questions related to Tamarisk Bank (creditor).

1. Compute the loss Tamarisk Bank will suffer under this new term modification (Loss on restructuring of debt)

2. Prepare the journal entry to record the loss on Tamarisk’s books

3. Prepare the interest receipt schedule for Tamarisk Bank after the debt restructuring.

4. Prepare the interest receipt entry for Tamarisk Bank on December 31, 2021, 2022, and 2023.

5. What entry should Tamarisk Bank make on January 1, 2024?

Answer 1

1. Compute the loss Tamarisk Bank will suffer under this new term modification (Loss on a restructuring of debt)

Pre-restructuring carrying amount of Note		$2,200,000
Less: Present value of restructured future cash flow:
PV of principal [($1440000) × PVF (12%,3) due in 3 year at 12%)] = [$1440000 × 0.71178	$1,024,963
PV of Interest [$144000 × PVAF(12%,3) = $144000 × 2.40183	$345,863	$1,370,826
Loss on debt restructuring		$829,174

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2. Prepare the journal entry to record the loss on Tamarisk’s books

Date	Account Titles and Explanation	Debit	Credit
Dec. 31, 2020	Bad debt Expense	$829,174
	Allowance for Doubtful Accounts		$829,174
	(To record bad debt expense)

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3. Prepare the interest receipt schedule for Tamarisk Bank after the debt restructuring.

Date	Cash Interest @10%	Effective Interest @12%	Increase in Carrying Amount	Carrying amount
12/31/2020				$1,370,826
12/31/2021	$144,000	$164,500	$20,500	$1,391,326
12/31/2022	$144,000	$166,960	$22,960	$1,414,286
12/31/2023	$144,000	$169,714	$25,714	$1,440,000
Total	$432,000	$501,174	$69,174

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4. Prepare the interest receipt entry for Tamarisk Bank on December 31, 2021, 2022, and 2023.

Date	Account Titles and Explanation	Debit	Credit
Dec. 31, 2021	Cash	$144,000
	Allowance for Doubtful Accounts	$20,500
	Interest Revenue		$164,500
	(To record interest revenue)
Dec. 31, 2022	Cash	$144,000
	Allowance for Doubtful Accounts	$22,960
	Interest Revenue		$166,960
	(To record interest revenue)
Dec. 31, 2023	Cash	$144,000
	Allowance for Doubtful Accounts	$25,714
	Interest Revenue		$169,714
	(To record interest revenue)

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5. What entry should Tamarisk Bank make on January 1, 2024?

Date	Account Titles and Explanation	Debit	Credit
Jan. 01, 2024	Cash	$1,440,000
	Allowance for Doubtful Accounts	$760,000
	Note Receivable		$2,200,000