P14-13 (LO6) (Restructure of Note under Different Circumstances) Halvor Corporation is having financial difficulty and therefore...

P14-13 (LO6) (Restructure of Note under Different Circumstances) Halvor Corporation is having financial difficulty and therefore has asked Frontenac National Bank to restructure its $5 million note outstanding. The present note has 3 years remaining and pays a current rate of interest of 10%. The present market rate for a loan of this nature is 12%. The note was issued at its face value.

Instructions

The following are four independent situations. Prepare the journal entry that Halvor and Frontenac National Bank would make for each of these restructurings.

(a) Frontenac National Bank agrees to take an equity interest in Halvor by accepting common stock valued at $3,700,000 in exchange for relinquishing its claim on this note. The common stock has a par value of $1,700,000.

(b) Frontenac National Bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book value of $3,250,000 and a fair value of $4,000,000.

(c) Frontenac National Bank agrees to modify the terms of the note, indicating that Halvor does not have to pay any interest on the note over the 3-year period.

(d) Frontenac National Bank agrees to reduce the principal balance due to $4,166,667 and require interest only in the second and third year at a rate of 10%.

Expert Solution

On the books of Halvor corporation

Transaction	account titles and explanation	debit	credit
A	notes payable	5000000
	Common Stock		1700000
	Paid in capital in excess of par - common stock		2000000
	Gain on restructuring of debt (5000000-3700000)		1300000
B	notes payable	5000000
	Land		3250000
	Gain on disposal of plant assets (4000000-3250000)		750000
	Gain on restructuring of debt (5000000-4000000)		1000000
C	no entry
	(because aggregate cash flows - carrying amount)
	Aggregate cash flows - 5000000
	Carrying amount - 5000000
D	no entry (because aggregate cash flows = carrying amount)
	Aggregate cash flows Principal =4166667 + interest (416666710%2)=833333 Aggregate cash flows =5000000 Carrying amount = 5000000

On the books of Frontenac National Bank

Transactions	account titles and explanation	debit	credit
A	equity investments	3700000
	Allowance for Doubtful Accounts	1300000
	Notes receivable		5000000
B	Land	4000000
	Allowance for Doubtful Accounts	1000000
	Notes receivable		5000000
C	bad debt expense	1243400
	Allowance for Doubtful Accounts		1243400
	Prestructure carrying cost - 5000000
	Less: Present value of carrying amount (5000000*0.75132) 3756600 Creditor's loss on restructuring debt =1243400
D	bad debt expense	1212100
	Allowance for Doubtful Accounts		1212100
	Prestructuring carrying value =5000000
	Less: present value due in 3 years (4166667*0.75132) = 3130500
	Present value of interest payable (4166667*2.48685) = 1036188
	Present value of first payment (4166667*0.90909)=378788 Total present value = 3787900
	Creditor's loss on restructuring debt =1212100

ekkarill92 answered 1 year ago

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