Exercise 14-23

On December 31, 2017, the Sunland Bank enters into a debt restructuring agreement with Barkley Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $4,100,000 note receivable by the following modifications:

1.		Reducing the principal obligation from $4,100,000 to $3,280,000.
2.		Extending the maturity date from December 31, 2017, to January 1, 2021.
3.		Reducing the interest rate from 12% to 10%.

Barkley pays interest at the end of each year. On January 1, 2021, Barkley Company pays $3,280,000 in cash to Sunland Bank. Answer the following questions related to Sunland Bank (creditor).

(a)What interest rate should Sunland Bank use to calculate the loss on the debt restructuring? (Round answer to 0 decimal places, e.g. 18%.)

Interest rate

(b)Compute the loss that Sunland Bank will suffer from the debt restructuring.

Loss on restructuring of debt

$

(c)Prepare the journal entry to record the loss.

Date

Account Titles and Explanation

Debit

Credit

(d)Prepare the interest receipt schedule for Sunland Bank after the debt restructuring.

SUNLAND BANK Interest Receipt Schedule After Debt Restructuring Effective-Interest Rate
Date		Cash Received		Interest Revenue		Increase in Carrying Amount		Carrying Amount of Note

(e)Prepare the interest receipt entry for Sunland Bank on December 31, 2019

Date

Account Titles and Explanation

Debit

Credit

(f)What entry should Sunland Bank make on January 1, 2021?

Date

Account Titles and Explanation

Debit

Credit