Question

In: Accounting

Entries to record restructuring of debt. Rose Corporation was unable to service its outstanding debts. The...

Entries to record restructuring of debt. Rose Corporation was unable to service its outstanding debts. The company is considered to be experiencing significant financial difficulties. In an attempt to avoid filing for bankruptcy, it took the following measures:

a) Patents with book value of $140,000 and accumulated amortization of $115,000 were sold for $20,000.

b) Goodwill with a book value of $150,000 resulted from the acquisition of a small manufacturing firm in Indiana. The goodwill was tested for impairment, and it was concluded that $100,000 of the goodwill was impaired.

c) A mortgage on a parcel of vacant land had a book value of $230,000. The land with a book value of $210,000 was sold for net proceeds of $185,000 after payment of $10,000 of Transaction costs. The mortgage holder accepted the proceeds in full settlement of the mortgage and related accrued interest of $15,000.

d) A loan from a major shareholder/employee had a remaining principal amount of $150,000 plus accrued interest of $4,500 based on the state rate of 12% payable quarterly. Given significantly lower current market rates, the shareholder agreed to restructure the debt as follows: 6% interest, 16 quarterly payments of principal and interest in the amount of $8,810.25, and receipt of a cash bonus of $30,000 in satisfaction of any remaining debt.

e) A major vendor had a payable balance of $85,000, which had remained unpaid for over five months. In satisfaction of the payable, the vendor agreed to receive an immediate cash payment of $15,000 plus six monthly payments of $10,000 each.

f) Bank debt with an outstanding balance of $532,000 including accrued interest of $22,000 was reduced by $80,000 in exchange for investment securities that were recorded at their market value of $62,000. Another $200,000 of debt was exchanged for treasury stock of the company that had a par value of $50,000 and an original cost of $150,000. The balance of debt was restructured calling for 10 quarterly payments of $27,470.38. The original bank debt had a stated interest of 8%.

g) A bank note payable with a balance of $60,000 was restructured by making three quarterly payments of $17,000.

h) A partially secured creditor with a debt balance of $120,000 repossessed equipment that served as collateral. The equipment had a book value of $220,000 and accumulated depreciation of $150,000. The remaining $40,000 of debt was to be paid over the next six quarters in equal payments bearing interest at 5.6%, compared to the original rate of 6.4%.

Required: Prepare all of the necessary entries to record the above events (a) through (h). Determine the total amount of interest expense to be recognized in connection with the first quarterly payment associated with the restructured debts.

Solutions

Expert Solution

Account Title Debit Credit
a. Cash 20000
Accumulated amortisation-Patents 115000
Loss on sale of patents 120000
Patents 255000
b.Impairment loss 50000
Goodwill 50000
c.Cash 185000
Transaction costs 10000
Loss on sale of land 15000
Land 210000
Mortgage payable 230000
Interest on mortgage 15000
Cash 185000
Gain on early retirement 60000
d. Loan payable 150000
Interest payable 4500
Bonus to shareholder 30000
Restructured Loan from Shareholder 124500
PV of debt=8810.25*(1-1.015^-16)/0.015
Cash 30000
Gain on restructuring 30000
e. Account payable 85000
Cash 15000
Account payable(10000*6) 60000
Gain on restructuring 10000
f.Bank debt 80000
Investment securities 62000
Gain on exchange 20000
Bank debt 200000
Treasury stock 150000
Gain on restructuring 50000
Bank debt(532000-80000-200000) 242000
Accrued Interest 10000
Restructured Debt(27470.38*(1-1.02^-10)/0.02 246755
Gain on restructuring 5245
g.Bank Note Payable 60000
Restructured Debt(17000*3) 51000
Gain on restructuring 9000
h. Accumulated Depreciation 150000
Account payable 70000
Equipment 220000
Gain on restructuring 10000
Account payable 40000
Account Payable Restructured 40000
40000=PMT*(1-1.014^-6)/0.014
Qtrly.payment=$ 6997
Total amount of interest expense to be recognized in connection with the first quarterly payment associated with the restructured debts
d. Shareholder loan 124500*1.5%= 1868
f. Bank debt 246755*2%= 4935
h. Creditor 40000*1.4%= 560
Total amount of interest expense for the Qtr. 7363

Related Solutions

Joe Electric, Inc. is unable to pay some outstanding debts. They have a loan for $11,000...
Joe Electric, Inc. is unable to pay some outstanding debts. They have a loan for $11,000 which was due on March 1,2019 and another for $6,000 which was due on November 1, 2019 both at 6.0% interest. Joe, the company owner, has made arrangements to payoff the two outstanding loans at 6.5% interest on September 10, 2019 What will be the final payment amount on September 10,2009 to satisfy all of Joe Electric, Inc.’s debts if the agreed upon focal...
Prepare journal entries to record the following items affecting the Allowance for Bad Debts account for...
Prepare journal entries to record the following items affecting the Allowance for Bad Debts account for Chief Ugundi. Show work on calculations supporting your amounts. Chief Ugundi reported $500,000 as total credit sales for the period with related costs of $350,000. Account Debit Credit Calculate the Gross margin % on the above sales ________. Based on past experience, he estimated that 4% of total credit sales would NOT be collected. Account Debit Credit Chief Ugundi gave up trying to collect...
A company has 10,000 shares of $10 par common stock outstanding. Prepare entries to record the...
A company has 10,000 shares of $10 par common stock outstanding. Prepare entries to record the following: a. Purchased 1,000 shares of treasury stock at $12. The treasury stock is accounted for by the cost method. There were no previous purchases of treasury shares. If an amount box does not require an entry, leave it blank. b. Sold 500 shares of treasury stock at $15. If an amount box does not require an entry, leave it blank. c. Purchased equipment...
Record the journal entries for the following facts. 1,000 shares of common stock outstanding. 600 shares...
Record the journal entries for the following facts. 1,000 shares of common stock outstanding. 600 shares of cumulative preferred stock, dividend $3 The cumulative preferred stock has been outstanding for 20 years. Paid dividends two years ago. Paid no dividends last year. The board of directors declared $5,000 of dividends for the current year Paid the dividends ten days after they were declared.
Record the following transactions in the journal of Debt Service Fund and Governmental Activities. (You must...
Record the following transactions in the journal of Debt Service Fund and Governmental Activities. (You must prepare the journal form using Excel) As of December 31, 2019, Pepa City had $9,500,000 in 4.5 percent serial bonds outstanding. The serial bonds pay interest semiannually on July 1 and December 31, with $500,000 in bonds being retired on each interest payment date. Resources for payment of principal and interest are transferred from the General Fund. Prepare debt service fund and government-wide entries...
Record these transactions of the XYZ Corporation company by recording the debit and credit entries directly...
Record these transactions of the XYZ Corporation company by recording the debit and credit entries directly in the T-accounts. Use the date for each transaction to identify the entries, placing the date in the left-hand cell and the amount in the right-hand cell on the appropriate side of the T-account. Then determine the balance of each account using the starting balances as shown, and write 'Balance' (or 'Bal') next to it, in the left-hand cell on the appropriate side. August...
Suppose the BDJ Corporation has decided in favor of a capital restructuring that involves increasing its...
Suppose the BDJ Corporation has decided in favor of a capital restructuring that involves increasing its existing $80 million in debt to $125 million. The interest rate on the debt is 9 percent and is not expected to change. The firm currently has 10 million shares outstanding, and the price per share is $45. If the restructuring is expected to increase the ROE, what is the minimum level for EBIT that BDJ’s management must be expecting? Ignore taxes for this...
​​​​​​Hewlitt Corporation established an early retirement program as part of its corporate restructuring. At the close...
​​​​​​Hewlitt Corporation established an early retirement program as part of its corporate restructuring. At the close of the voluntary sign-up period, 68 employees had elected early retirement. As a result of these early retirements, the company incurs the following obligations over the next eight years: Year 1 2 3 4 5 6 7 8 Cash Required 430 210 222 231 240 195 225 255 The cash requirements (in thousands of dollars) are due at the beginning of each year. The...
describe at least two typical adjusting entries a service-type business would need to record to bring...
describe at least two typical adjusting entries a service-type business would need to record to bring account balances up-to-date. For your examples, one of the adjusting entries should be an accrual and another a deferral. You may use similar examples as those in your textbook and you may also research other typical adjusting entries for service-type companies. Be sure to address the following questions: What are the purposes of each of your example adjusting entries? Why are these adjusting entries...
Prepare journal entries to record the following transactions that occurred for this company in its second...
Prepare journal entries to record the following transactions that occurred for this company in its second year of operations. • Year 2 sales on account: $5,700,000. • Year 2 collections of accounts receivable: $5,900,000. • Year 2 write-offs: $44,000 • Year 2 reinstatements and subsequent collections of reinstated accounts: $29,000 • 12/31/Y2: Year-end adjustment to record estimated uncollectible accounts at 4% of credit sales. Directions: Prepare all journal entries, post to accounts, and show the year-end balance sheet presentation of...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT