Question

Exercise 14-23 (Part Level Submission) On December 31, 2017, the Pina 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, $3,800,000 note receivable by the following modifcations: 1. Reducing the principal obligation from $3,800,000 to $3,040,000 2. Extending the maturity date from December 31, 2017, to January 1, 2021 3. Reducing the interest rate from 12% to 10%, Barkley pays interest at the end of each year. On January 1, 2021, Barkdey Company pays $3,040,000 in cash to Pina Bank. Answer the following questions related to Pina Bank (creditor) Y (a) 回your answers correct. what interest rate should Pina Bank use to calculate the loss on the debt restructuring? (Round answer to O decimal places, e.g. 18%.) Cellegse qveition part Interest rate W LIST OF ACCOUNTS SHOW SOLUTION SHOW ANSwen Attempts: 1 of 3 used

Answer 1

Answer :-

( a ) :-

The Pina Bank should utilize the recorded loan cost of 12% to compute the misfortune .

( b ) :-

( 1 ) :-

Particulars	Amount	Amount
The loss is computed as follows:
Pre-restructuring carrying amount of note		$3,800,000
Present value of restructured future cash flows:
Present value of principal	=$ 3,040,000 * PV ( 12% , 3 years ] = $3,040,000 * 0.71178 = $2,163,811.2
Present value of interest	= [ $3,040,000 * 10%] * PVA ( 12% , 3 years ] = $304,000 * 2.40183 = $730,156.32	= $2,163,811.2 + $730,156.32 = $2,893,9673.52
Loss on debt restructuring		= $3,800,000 - $2,893,9673.52 = $906,032.48 = $906,032

( 2 ) :-

Date	Particulars	Debit	Credit
December 31,2017	Bad Debt Expense	$906,032
	Allowance for Doubtful Accounts		$906,032