I’m posting this comparison of my journal entry style with the one used in the Kieso, Weygandt & Warfield 13th edition textbook. You are going to do Exercise 14-24 which is a slight variation. Please use “my style” even though the solution manual in the accounting lab is in a different style!*EXERCISE 14-22 (25–30 minutes)(a) The American Bank should use the historical interest rate of 12% to calculate the loss.(b) Using time-value of money tables, the loss is computed as follows: Pre-restructuring carrying amount of note $3,000,000 Less: Present value of restructured future cash flows: Present value of principal $2,400,000 due in 3 years at 12% $1,708,272a Present value of interest $240,000 paid annually for 3 years at 12% 576,439b 2,284,711Loss on debt restructuring $ 715,289Calculated with tables:a$2,400,000 X .71178 = $1,708,272.b$240,000 X 2.40183 = $576,439.Using Excel or a financial calculator it is a one step problem with the following inputs:n=3, i=12%, pmt=240,000, fv=2,400,000, “end” and solve for PV = 2,284,712.099December 31, 2010 – TEXTBOOK STYLEBad Debt Expense.............................................................................715,289Allowance for Doubtful Accounts........................................ 715,289December 31, 2010 – T GORDON STYLEAllowance for doubtful accounts.................................... 715,288Note Receivable (restructured) 2,284,712Note Receivable (old).............................................. 3,000,000(c) The interest receipt schedule is prepared as follows:Note that this is the same amortization tables for either style of journal entry!AMERICAN BANKInterest Receipt Schedule After Debt RestructuringEffective-Interest Rate 12%DateCashReceived(10%)InterestRevenue (12%)Increase in CarryingAmountCarrying Amountof Note12/31/10 $2,284,71112/31/11 $240,000a$274,165b$ 34,165c 2,318,87612/31/12 240,000 278,265 38,265 2,357,14112/31/13 240,000 282,859* 42,859 2,400,000Total $720,000 $835,289 $115,289a$2,400,000 X 10% = $240,000.b$2,284,711 X 12% = $274,165.c$274,165 – $240,000 = $34,165.*Rounded $2TEXTBOOK STYLE ENTRIES:(d) Interest receipt entry for American Bank is:December 31, 2012Cash....................................................................................................240,000Allowance for Doubtful Accounts...................................................38,265Interest Revenue..................................................................... 278,265(e) The receipt entry at maturity is:January 1, 2014Cash....................................................................................................2,400,000Allowance for Doubtful Accounts...................................................600,000Note Receivable...................................................................... 3,000,000*EXERCISE 14-22 (Continued)T GORDON STYLE ENTRIES:(d) Interest receipt entry for American Bank is:December 31, 2012Cash...................................................................................240,000Note Receivable (restructured)........................................38,265Interest Revenue...................................................... 278,265(e) The receipt entry at maturity is:January 1, 2014Cash...................................................................................240,000Interest revenue................................................................ 282,859Note Receivable (restructured)..............................42,859Cash 2,400,000Note Receivable (restructured) 2,400,000COMPARISON BALANCE SHEETSImmediately after restructuringT GORDON STYLENote Receivable$2,284,711The adjustment to the allowance account would result in an entry to bad debt expense based.TEXTBOOK STYLENote Receivable3,000,000Less allowance 715,289Net Receivable $2,284,711One year after restructuringT GORDON STYLENote Receivable$2,318,876Any allowance account would be adjusted as part of another process to see what amounts are deemed uncollectible with respect to the OTHER notes receivable TEXTBOOK STYLENote Receivable3,000,000Less allowance 681,124Net Receivable $2,318,876This is only the specific part of the allowance account related to this particular note – there wouldbe other adjustments to the allowance for other estimated bad debtsAllowance balance would be reduced by $ 34,165c so $715,289 – 34,165 = 681,124Two years after restructuringT GORDON STYLENote Receivable $2,357,141Any allowance account would be adjusted as part of another process to see what amounts are deemed uncollectible with respect to the OTHER notes receivable TEXTBOOK STYLENote Receivable3,000,000Less allowance 642,859*Net Receivable $2,357,141This is only the specific part of the allowance account related to this particular note – there wouldbe other adjustments to the allowance for other estimated bad debts*Allowance balance would be reduced by $38,265 so $681,124 – 38,265 = 642,859Conclusion – the entries get have exactly the same impact on the balance sheet and the income statement. The difference is that we are in essence setting up a “Discount on Notes Receivable” account for each separate loan. In other words, there would be a separate allowance account for each restructured loan that would have to be treated as a “pair of accounts” just like we do for bonds payable with a premium or discount.In practice, it is more common to have a “general allowance” account related to the receivables as a whole - it is tested for accuracy at each balance sheet date. With the textbook method, you would still have to do this testing but it would be more work if you couldn’t analyze GROUPS of receivables using tools such as an aging of receivables