Question

Exercise 14-23 (Part Level Submission) On December 31, 2020, Cullumber Bank enters into a debt restructuring agreement with Barkley Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $3,900,000 note receivable by the following modifications: 1. Reducing the principal obligation from $3,900,000 to $3,120,000. 2. Extending the maturity date from December 31, 2020, to January 1, 2024. 3. Reducing the interest rate from 12% to 10%. Barkley pays interest at the end of each year. On January 1, 2024, Barkley Company pays $3,120,000 in cash to Cullumber Bank. Answer the following questions related to Cullumber Bank (creditor).

(a) Your answer is correct. What interest rate should Cullumber Bank use to calculate the loss on the debt restructuring? (Round answer to 0 decimal places, e.g. 18%.) Interest rate % SHOW LIST OF ACCOUNTS SHOW SOLUTION SHOW ANSWER LINK TO TEXT Attempts: 1 of 3 used

(b) (1) Compute the loss that Cullumber Bank will suffer from the debt restructuring. (Round answer to 0 decimal places, e.g. 38,548.) Loss on restructuring of debt $ (2) Prepare the journal entry to record the loss. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit December 31, 2020

Answer 1

The Cullumber Bank should use the historical interest rate of 12% to calculate the loss
Pre-restructuring carrying amount of note		$3,900,000
Less:
Present value of restructured cash flows
Principal = PV(12%,3,0,-3120000)	$2,220,754
Annual Interest ($3,120,000 X 10%  = 312,000; PV(12%,3,-312000)	$749,371	$2,970,126
Loss on debt restructuring		$929,874
Prepare the journal entries
Account Titles and Explanation	Debit	Credit
Bad Debt Expense	$929,874
Allowance for Doubtful Accounts		$929,874