Problem 1

LOVES2FLY (L2F) purchased a single-engine plane from ABC Aviation on January 1, 2020. L2F paid $55,000 cash and signed a 3-year, 8% note for the remaining $45,000. Terms of the note called for L2F to pay accrued interest annually on December 31 with the remaining $45,000 balance due with the last interest payment on December 31, 2022. L2F uses straight-line depreciation for the plane with a useful life of 10 years and no salvage value. L2F made the first two interest payments but was unable to make the interest and principal payment due December 31, 2022. On January 1, 2023, ABC agreed to restructure the note receivable.

Calculate the amounts for L2F and ABC on the indicated dates under each of the independent scenarios below.

1. ABC agrees to take back the aircraft and cancel the amount owed. The market value of the plane on January 1, 2023 is $60,000.

For L2J:

1. Gain/loss on relinquishment of the plane
2. Gain/loss on settlement of the debt

For ABC:

3. Gain/loss on settlement of the debt

2. ABC agrees to modify the loan such that it accept a $5,000 cash payment on January 1, 2023 and a new $35,000 note receivable due on December 31, 2027. The note stipulates annual interest payments of $4,200 each December 31.

For L2J:

1. Amount due on the original debt on 1/1/2023
2. Gain/loss on restructuring of the debt
3. Amount at which new debt is recorded on 1/1/2023 (hint: this is impacted by the $5,000 payment on 1/1/2023)
4. Interest expense recognized on 12/31/2023 (hint: the answer is not $4,200)
5. Interest expense recognized on 12/31/2024
6. Balance in the Note Receivable account on 12/31/2027 after recording the final interest payment but before paying the note balance

For ABC:

7. Gain/loss on restructuring of the debt
8. Amount at which new debt is recorded on 1/1/2023
9. Interest expense recognized on 12/31/2023 (hint: the answer is not $4,200)
10. Interest expense recognized on 12/31/2024
11. Balance in the Note Receivable account on 12/31/2027 after recording the final interest payment but before paying the note balance

3. ABC agrees to accept a new note which calls for a single payment of $45,000 on December 31, 2027.

For L2J:

1. Gain/loss on restructuring of the debt
2. Amount at which new debt is recorded on 1/1/2023
3. Interest expense recognized on 12/31/2023
4. Interest expense recognized on 12/31/2024

For ABC:

5. Gain/loss on restructuring of the debt
6. Amount at which new debt is recorded on 1/1/2023
7. Interest expense recognized on 12/31/2023
8. Interest expense recognized on 12/31/2024