Project 2 Assignment

Debt Restructuring

Scofield Enterprises has a customer who purchased a software system for $10,000 and arranged to pay for the system over 60 months in an equal payment note. The owner of Scofield Enterprises sat down with your boss this week when she realized that the customer wasn't going to make his next payment. Their conversation is available at ACCT 3310 Professional Application: Part 2 provided below in this folder.

REQUIRED:

1. Download the Project 2 Spreadsheet and customize your project by entering your phone number on the Start Here worksheet.
2. Listen to and watch the conversation between the accountant and the owner at ACCT 3310 - Professional Application: Part 2.
3. Use the information on the Original Debt Contract worksheet in the Project 2 Spreadsheet plus the information you gather from the owner / accountant's discussion to develop an amortization for the original debt contract. You should pay particular attention to the following issues

• When you calculate interest in a spreadsheet the number is accurate to fractions of a penny, but customers can only pay in pennies. Round the interest you calculate to the higher penny (to the advantage of your client) using the appropriate EXCEL function.
• Because interest and payment are both rounded numbers, the amortization table will not work out exactly to a final principal of 0. The final payment should be adjusted to exactly the amount needed to pay off the debt.

1. Then restructure the debt contract to lower the monthly payment. You should identify the features that you have changed between the original debt contract and then new debt contract and create a new amortization table based on the new principal, the new term of the debt, and the new interest rate. Use the EXCEL function PMT to find the payment for your restructured debt contract. You will need to round interest payments to the next penny and set the final payment to exactly pay off the debt, as you did in (3) above.
2. GAAP requires that the lender record the value of the note on its books at the present value of the payments using the original interest rate (even if the interest rate is changed in the restructuring). Calculate the GAAP value of the restructured note.
3. Calculate the loss on note restructuring as the difference between the carrying value of note immediately before restructuring and the value you calculated in (5).
4. Prepare a memorandum in a separate WORD file to the owner that

• presents your recommended restructuring of the debt, supporting the changes you are making
• explains the amortization table of the restructured note and the loss on note restructuring.

NOTE: Each piece of numerical information should be entered into the workbook just once. You should use cell addresses in all subsequent formulas -- even to bring information from one worksheet to the next. Your workbook should be sufficiently integrated that a change to the number in the new debt contract will flow through to the final amortization table without your having to make any additional adjustments

Accountant Business Owner Accountant Business Owner Accountant Business Owner Accountant Business Owner Accountant Business Owner Accountant Business Owner Accountant Business Owner Accountant Business Owner Accountant Business Owner Accountant Business Owner Accountant Come in. Thank you for seeing me today. I have a problem with one of my major customers, and I was hoping that you could help me. I'll be glad to do what I can. Tell me about it. Well, this new software start-up purchased a $10,000 software system from us. How wonderful. Except that now it has stopped paying. Did you the customer sign a note as we suggested when we completed your business plan? Yes, we set up a note for it to pay a very modest payment per month for 60 months. And he made the first 8 payments. I was expecting a payment yesterday, but instead he called me to say that he was having cash flow problems and wouldn't be able to make the payment. I am so disappointed in him. The system is exactly what he needed to grow his business. But I don't know what to do now. The best course of action depends on what you think are the prospects for your customer. Do you really think that he will be able to pay in the long run? That's exactly the problem. I know that I could bring legal action or even force him into bankruptcy, since he really can't pay right now. But I think I'll get more if I wait and let him pay when his business improves. But it would be such a bad example in front of my other clients to just let someone get out of making payments. What should I do? The situation you are describing suggests that you could restructure the note. How much do you think he could pay - and when could he start paying? He assured me that he could pay about $150 beginning as soon as next month. That's really good news. It sounds as though he is committed too. Now there are several ways to bring down the payments for your customer, but still recover your selling price. What do you mean? The payments are calculated to pay off the note in 60 months with a relatively high interest rate. Those payments would be smaller if you extended the term of the note and let him pay over a longer period. That's a possibility. Or you could adjust the interest rate you are charging. Since interest rates have come down some over this last year, you might consider lowering his interest rate. That would also lower his payments. Sure. It does seem that he made his purchase just at a time when interest rates were at their highest, and I'm using a lower interest rate for my clients now. Finally, you should also consider what to do about the interest that is accruing right now. What do you mean? Even though he missed the payment this month, he still owes for the interest portion of the payment he missed. So during this period he isn't paying, the amount of the note is actually getting larger by the amount of interest that is accumulating. Sometimes in these circumstances, you may get more in the long run by restructuring the note so that the additional interest is added into the principal and paid along with the principal instead of insisting on the interest up Business Owner Accountant Business Owner Accountant Business Owner Accountant Business Owner Accountant Business Owner Accountant Business Owner Accountant Business Owner front. I would even consider starting over and ignoring the interest that has accumulated. In restructuring the note, that is called \"forgiveness\" of the accrued interest, and it certainly is a possibility. In fact, since your prices include a mark-up over cost, you may even want to forgive some of the principal, just to get the payments down to the level he can handle and be sure that you get at least some recovery. I see what you mean. I actually could reduce the principal and still have positive margin on the sale. But that would be a last resort in my mind. But I like your idea of offering him a restructured note that will reduce his payments to $150 and get him back current on the new deal. Do you know how much principal he owes right now? No. How would I figure that? We can create an amortization table for you using the original note parameters of principal, interest rate, and term to see what was owed after the last payment he made. Then we'll add in the accrued interest for this month. But how will I know how to change the note? There are a lot of possibilities. We can Lower the interest rate Extend the term Forgive the accrued interest Forgive a portion of the principal If you like, I can make a recommendation for the restructuring and create an amortization table for the original terms and the new terms for you to consider. That sounds great. There is just one more thing to discuss because I don't want you to be surprised. When we record the restructured notes on your books this month, we'll add in an adjustment for the loss you are likely to have because you will be getting less from the customer than you originally planned. But I thought you said that I'll be more likely to get my money back if I restructure. You will have better cash flows with a restructured note than you are getting right now. But the delay in payments and possibly the smaller amount of payments will affect our calculation of the principal of the note receivable. I don't actually know whether there will be a loss or not right now or the amount, but I can let you know that in the morning. Remember that any loss is really just a reduction in the markup you charged originally, so you still have some profit in this sale. We want to put paying this note back at the top of your customer's priorities. I guess I let my enthusiasm for the customer's new business overshadow my usual caution when working with a new client. Let's go ahead. Directions: Enter your phone number, one number per cell, in the cells below: Phone Number 4 3 2 2 7 2 Use the information on the Original Debt Contract worksheet and the information from the video Professional Application: Part assignment. Additional Information Needed: 9 7 8 Professional Application: Part 2 to complete this 6 Original Debt Contract Original Principal $ 10,000 Original Term 60 months Original Interest Rate 13.00% Original Payment $ 228.00 Additional Information Number of Payments Made 8 Date Account Posting Reference Debit Credit New Debt Contract (Suggested format) Put Values In this Column Carrying Value of Debt at the start of the new debt contract Forgiveness of Interest Accrued, if any Forgiveness of Principal, if any New Debt Contract's Principal New Debt Contract's Interest Rate (annual) New Debt Contract's Term (in months) New Debt Contract's Payment (rounded to the nearest dollar) GAAP Value of Restructured note Loss on Note Restructuring format) Comment From Original Debt Contract Amortization Table Your choice Your choice Calculated based on rows 3 to 5 above Your choice Your choice Calculated based on time value of money functon PMT Calculated based on time value of money function PV Calculated as Row 3 value - Row 10 value