Required for Creditor:Required for Creditor:Acct 414 – Spring 2011 Page 1 Homework Problems (HW#4) Spring 2011 Impairment & Restructuring of Receivables 1. On December 31, 2008, Jones Bank loaned $200,000 to Steel Corporation. Steel Corporation signed a note payable which specified 10% interest and repayment at the end of 5 years. During 2010, Steel Corporation’s financial condition deteriorated due to a faltering regional economy. On December 31, Jones Bank agreed to accept a piece of used equipment and cancel the entire debt. (All interest owed through 12/31/10 has been paid). Jones Bank doesn’t want the equipment but it anticipates it will be able to sell the equipment for $175,000. On Steel Corporation’s books, the equipment has a historical cost of $390,000 and accumulated depreciation of $221,000. Prepare the journal entries that Jones Bank would make on 12/31/10 when it accepted the used equipment as payment in full. 2. On February 1, 2011, a 12%, $500,000 note due to Oregon Bank & Trust came due but Oilcan Wholesalers Corporation does not have enough cash to make the payment. Oilcan Wholesalers has already recorded as interest expense the $60,000 unpaid accrued interest and the bank has, likewise, booked the interest revenue receivable. The original note specified annual payments of $100,000 in principal per year plus 12% interest on the unpaid balance. Since Oilcan Wholesalers is unable to make the payments, the bank has agreed to restructure the terms of the loan. The new loan agreement requires immediate payment of $30,000. The term of the loan is extended until February 1, 2015 and Oilcan Wholesalers will pay interest only for the first three years. The interest rate is reduced from 12% to 8% and the principal amount is reduced by $500,000 to $300,000. Four years from now, the balloon payment will come due, i.e., $300,000 principal plus $24,000 interest. Assume both debtor and creditor have December 31 year ends. Required for Creditor: a. What is the new carrying value of the restructured receivable on Oregon Bank & Trust’s books immediately following receipt of the first $30,000 payment on February 1, 2011? b. Effective interest method. Prepare all journal entries for 2011 and 2012 assuming all payments are made as scheduled and the bank uses the effective interest method of accounting for impaired loans. (Preparing an amortization table is recommended and will help to accrue interest at year end). c. Cost recovery method. Prepare all journal entries for 2011 and 2012 assuming all payments are made as scheduled and the bank uses the cost recovery method of accounting for impaired loans.Acct 414 – Spring 2011 Page 2 3. On November 1, 2010, a 10%, $750,000 note due to Idaho Bank & Trust came due but Franklin Corporation does not have enough cash to make the payment. Franklin has already recorded as interest expense the $75,000 unpaid accrued interest and the bank has, likewise, booked the interest revenue receivable. Since Franklin is unable to make the payments, the bank has agreed to restructure the terms of the loan. The term of the loan is extended until November 1, 2015 and Franklin will pay interest only for the first four years. The interest rate is reduced from 10% to 7% and the principal amount is reduced from $750,000 to $500,000. Five years from now, the balloon payment will come due, i.e., $500,000 principal plus $35,000 interest. Assume both debtor and creditor have December 31 year ends. Required for Creditor: a. What is the new carrying value of the restructured receivable on Idaho Bank & Trust’s books immediately following receipt of the first $30,000 payment on December 1, 2007? b. Effective interest method. Prepare all journal entries for 2010 and 2011 assuming all payments are made as scheduled and the bank uses the effective interest method of accounting for impaired loans. (Preparing an amortization table is recommended and will help to accrue interest at year end). c. Cost recovery method. Explain how your answer would be different if the bank used the cost recovery method instead of the effective interest method to record the receipts on the
View Full Document
Unlocking...