Question

On December 31, 2017 American Bank enters into debt restructuring agreement with Swifty Company which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $4400000 note receivable by the following modifications:

1. Reducing the principal obligations from $4400000 to $3520000

2. Extending the maturity date from December 31, 2017 to January 1, 2021

3. Reducing the interest rate from 12% to 10%

Swifty pays interest at the end of the year. On January 1, 2021 Swifty Company pays $3520000 in cash to American Bank.

a. Will the gain recorded by swifty be equal to the loss recorded by American Bank under the debt restructing?

b. Can swifty Company record a gain under the term modification mentioned above?

c. Assuming that the interest rate Swifty should use to compute interest expense in future periods is 1.4276% prepare the interest payment schedule of the note for Swifty Company after the debt restructuring.

d. Prepare the interest payment entry for Swifty Company on December 31, 2019.

e. What entry should swifty make on January 1, 2021.

Answer 1

Part 1

NO.

The debtor is not addressed by GAAP, due to "accounting asymmetry" treatment. It was the concern of FASB that the scope expansion of its pronouncement would result into the delay in the issuance of GAAP for the creditor

Part 2

NO

Total future cash flows after restructuring > total pre-restructuring carrying of the note (principal).

Total future cash flows after restructuring
Principal	3520000
Interest ((3520000*10%)*3)	1056000
Total	4576000
Total pre-restructuring carrying amount of note	4400000

Part 3

SWIFTY COMPANY

Interest Payment Schedule after Debt Restructuring

Effective-Interest Rate

date	Cash paid	Interest expense	Reduction of carrying amount	Carrying amount of note
12/31/17				4400000
12/31/18	352000	62814	289186	4110814
12/31/19	352000	58686	293314	3817500
12/31/20	352000	54499	297501	3519999

3520000*10% = 352000

Interest expense = previous year carrying amount of note * 1.4276%

Reduction of carrying amount = cash paid – interest expense

Carrying amount of note = previous year carrying amount of note – reduction of carrying amount

Part 4

Date	General journal	Debit	Credit
December 31, 2019	Notes payable	293314
	Interest expense	58586
	Cash		352000
	(to record the payment of interest)

Part 5

Date	General journal	Debit	Credit
January 1, 2021	Notes payable	3520000
	Cash		352000
	(to record the repayment of notes payable)