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.

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.

Show Work.

Answer 1

Journal Entries in the Books of FIRST LINCOLN BANK:

1. Land Account Dr $16

Capital Reconstruction account $14 (principal waiver $4+ five years interest $2*5=$10)

To Unsecured Note ( Debtor ) Account $30

(Being Final Settlement made for $16miillions instead of $20 millions)

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2. Calculation of interest per annum = $20000000 *10%=2000000pa means 2million $

-a. Entry ;for forgiving the interest of last year i.e 2 millions

Capital Reconstruction account Dr $2m

To Debtor account $2m

b. Capital Reconstruction account Dr $9 (Principal waiver $5+ interest waiver $1per annum for four year)

TO Unsecured Note account (Debtors ) $9

(Being the waiver of $9)

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Calculation of total Payable Amount

Principal outstanding - $20000000

Interest Ounstanding for Five Years @10% - $10000000

Total Payable = $30000000

Actually Paid = $27775000

Amount of waiver = $2225000

3. Bank Account Dr - 27775000  

Reconstruction Account $2225000

To Unsecured Note (Debtor) Account $30000000