Assume the same information as in E14-24 and answer the following questions related to Green Bank (the creditor). Green Bank prepares financial statements in accordance with IFRS 9. There is no evidence of a significant increase in credit risk and 12-month expected credited losses are calculated at zero. For simplicity, assume that Green Bank had not recognized any impairment prior to this (although it likely would have done so under the expected loss model).
In E14-24
On December 31, 2017, Green Bank enters into a debt restructuring agreement with Troubled Inc., which is now experiencing financial trouble. The bank agrees to restructure a $2-million, 12% note receivable issued at par by the following modifications:
1. Reducing the principal obligation from $2 million to $1.9 million
2. Extending the maturity date from December 31, 2017 to December 31, 2020
3. Reducing the interest rate from 12% to 10%
Troubled pays interest at the end of each year. On January 1, 2021, Troubled Inc. pays $1.9 million in cash to Green Bank. Troubled prepares financial statements in accordance with IFRS 9.
Instructions
(a) What interest rate should Green Bank use to calculate the loss on the debt restructuring?
(b) Using time value of money tables, a financial calculator, and computer spreadsheet functions, calculate the loss that Green Bank will accrue based on the debt restructuring. Prepare the journal entry to record the loss.
(c) Prepare the amortization schedule for Green Bank after the debt restructuring.
(d) Prepare the interest receipt entry for Green Bank on December 31, 2019.
(e) What entry should Green Bank make on January 1, 2021?