"Your company is in financial trouble and is in the process of reorganizing. Your manager wants to know how you will report on restructuring the debt. Use the following information to help with this assignment. This is the liability section of your company?s balance sheet: CURRENT LIABILITIES Accounts payable $972,160 Accrued liabilities 2,071,270 Accrued claims costs 793,620 Federal and other income taxes 19,710 Deferred income taxes 500 Current maturities of long-term debt and capital lease obligations 50,610 Short-term borrowings 249,250 Total Current Liabilities 4,157,120 LONG-TERM LIABILITIES Capital lease obligation 54,580 Note outstanding 3,000,000 Mortgage outstanding 608,030 Other liabilities 95,860 Total long-term liabilities 3,758,470 Total Liabilities 7,915,590 Your company has asked the bank to settle its $3 million note outstanding. The present note has 3 years remaining and pays a current interest rate of 10%. The present market rate for a loan of this nature is 12%. The note was issued at its face value. The bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book value of $1,950,000 and a fair value of $2,400,000. For working capital your company has borrowed money from a new bank. The bank has issued a new $1.5 million note payable to your company. The note is payable in 5 annual installments of $300,000 due at the end of each year. The note is discounted to yield 8% to the bank (lender).

Restructuring Debt SECTION 1 - DEBT RESTRUCTURING 1(a) Complete entries for debt extinguishment of debt Date Account descriptions Debit Credit Debit Credit To record settlement of debt (debtor's entry) To record settlement of debt (lender's entry) 1(b) Calculate amount for new debt issuance and complete amortization schedule Note issue amount: Number of payments: Annual payments (end of year): Discount rate: 1,500,000 5 300,000 8.0% Cash received: Year Beginning Carrying Amount* Interest Expense Note Payment Ending Carrying Amount* * Carrying amount = Note + Discount 1(c) Complete entries for issuance of new note and year end note payment Date Account descriptions To record new note payable (debtor's entry) To record note payment and amortize discount (Assume no other interest has been recorded for the year) SECTION 2 - PENSIONS 2(a) Calculate the current annual pension expense Descriptions Amounts 2(b) Calculate the break even payroll level Descriptions Amounts Week 4 - Debt Restructuring Criteria 1(a) Correct journal entries for extinguishment of debt 1(b) Correct calculation of new debt and amortization schedule 1(c) Correct journal entries for new note and year-end debt payment 2(a) Correct calculation of defined benefit pension expense 2(b) Correct calculation of breakeven payroll for defined contribution plan CONTENT Utilizes provided layout correctly MECHANICS TOTAL ASSIGNMENT Possible Points % Comments Actual Points 20.0 22% See worksheet for comments and key 0.0 15.0 17% 0.0 20.0 22% 0.0 20.0 22% 0.0 10.0 11% 0.0 85.0 5.0 5.0 90.0 94% 6% 6% 100% 0.0 0.0 0.0 0%