(Debtor/Creditor Entries for Continuation of Troubled Debt with New Effective Interest)

Mildred Corp. owes D. Taylor Corp. a 10-year, 10% note in the amount of $110,000 plus $11,000 of accrued interest. The note is due today, December 31, 2007. Because Mildred Corp. is in financial trouble, D. Taylor Corp. agrees to forgive the accrued interest, $10,000 of the principal, and to extend the maturity date to December 31, 2010. Interest at 10% of revised principal will continue to be due on 12/31 each year.

Assume the following present value factors for 3 periods

Instructions

(a) Compute the new effective interest rate for Mildred Corp. following restructure. (Hint: Find the interest rate that establishes approximately $121,000 as the present value of the total future cash flows.)

(b) Prepare a schedule of debt reduction and interest expense for the years 2007 through 2010.

(c) Compute the gain or loss for D. Taylor Corp. and prepare a schedule of receivable reduction and interest revenue for the years 2007 through 2010.

(d) Prepare all the necessary journal entries on the books of Mildred Corp. for the years 2007, 2008, and 2009.

(e) Prepare all the necessary journal entries on the books of D. Taylor Corp. for the years 2007, 2008, and 2009.

Transcribed Image Text:

24% 238% 212% 25% 234% 3% Single sum .93543 .93201 .92859 Ordinary annuity of 1 2.86989 2.86295 2.85602 .92521 2.84913 .92184 .91514 2.84226 2.82861