Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

On December 15, 2017, Skeez Equipments, Inc., contacted Drumz International Bank, Inc., in order to discuss ways to renegotiate terms for the long term debt

On December 15, 2017, Skeez Equipments, Inc., contacted Drumz International Bank, Inc., in order

to discuss ways to renegotiate terms for the long term debt which it owed to the bank. The debt, coming

due on January 1, 2018, was a 8% 5-year note issued at par for $2,000,000 plus the annual interest on the

note for 2017. The interest was payable annually on January 1. The new terms agreed upon by both

parties were as follows:

L the amended terms would become effective January 1, 2018;

L Skeez would transfer a plot of vacant land with a book value of $90,000 and a fair market value

of $160,000 in full settlement of the the annual interest for 2017 which was due and unpaid as at

December 31, 2017;

L the principal payable was reduced to $1,800,000 and would be due January 1, 2023; and

L the annual interest coupon rate was to be reduced to 6% for the years, 2018 - 2022; and

L the market rate was determined to be 12% on January 1, 2018.

REQUIRED:

a] Show how this debt with the new terms, is to be classified. Be sure to provide clear and sufficient

computations to support your answer.

b] In the books of Skeez, provide the appropriate journal entry/entries to record the transaction

(i) for the transfer of the property.

(ii) for recording the negotiated debt.

c] Under the renegotiated terms, would Drumz International Bank make a gain or suffer a loss?

Provide the journal entry which the bank would prepare to record this transaction in its books

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial & Managerial Accounting

Authors: Jan Williams, Sue Haka, Mark Bettner, Joseph Carcello

15th Edition

0073526991, 9780073526997

More Books

Students also viewed these Accounting questions

Question

What is Larmors formula? Explain with a suitable example.

Answered: 1 week ago