Question

In: Accounting

P14.12 (LO 5) (Debtor/Creditor Entries for Continuation of Troubled Debt) Daniel Perkins is the sole shareholder...

P14.12 (LO 5) (Debtor/Creditor Entries for Continuation of Troubled Debt) Daniel Perkins is the sole shareholder of Perkins 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. Perkins Inc.'s $600,000, 12%, 10-year note was refinanced with a $600,000, 5%, 10-year note.

Instructions

What is the accounting nature of this transaction?
Prepare the journal entry to record this refinancing:

On the books of Perkins Inc.
On the books of United Bank.

Discuss whether generally accepted accounting principles provide the proper information useful to managers and investors in this situation.

Please show how the amount to multiply $600,000 is determined.

Expert Solution

a.

Accounting nature of this transaction would be

'Extinguishment of debt'

b.

There will be no journal entry on the books of Pearl Inc.

The amount to multiply by $600,000 is decided using these tables:

PV Table (Present Value of $1)

PVA Table (Present Value of $1 Annuity)

Note amount before refinancing = 600,000

PV of 600,000 due in 10 years @ 12 % = 600,000 * PV factor @ 12%, n = 10 years

= 600,000 * 0.3220 = 193,200

PV of annual interest payable on note = (600000 * .05) * PV of annuity @ 12% for 10 years

= 30,000 * 5.6502

= 169,506

Credit loss after refinance = 600,000 – 193,200 - 169,506

= 237,293

Journal entry:

c.

GAAP here provided a better presentation of information by calculating the loss to be recognized on account of restructuring by the bank which is useful to managers to prepare and present financial statements in true and fair view and helps investors know the position of the company.

ekkarill92 answered 1 year ago

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.

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