Exercise 1427 Vargo Corp Because Vargo Corp 31 2019 reduce t

Exercise 14-27 Vargo Corp Because Vargo Corp. 31, 2019, reduce the principal to $220,000, and reduce the interest r p. owes $270,000 to First Trust. The debt is a 10-year, 12% note due December 31, 2017. is in financial trouble, First Trust agrees to extend the maturity date to December December 31. ate to 5%, payable annually on (a) Prepare the journal entries on Vargo\'s books on December 31, 2017, 2018, 2019. (b) Prepare the journal entries on First Trust\'s books on December 31, 2017, 2018, 2019. (a) Date Account Titles and Explanation Debit Credit Vargo Corp.\'s 2017 2018 2019 (b) Date Account Titles and Explanation Debit Credit 2017 2018 2019 (To record Interest Revenue) (To record maturity of Notes Receivable) Question Attempts: Unlimited 5 Sors ine or reaned companes All rights reserved

Solution

Solution:

Debit

Credit

Vargo Corp.’s entries

31-Dec-17

Dr. Notes Payable

28,000

Cr. Gain on Restructuring of Debt

28,000

31-Dec-18

Dr. Notes Payable

11,000

Cr. Cash

11,000

(5% * $220,000)

31-Dec-19

Dr. Notes Payable

231,000

Cr. Cash

231,000

220,000 + (5% * $220,000)

First Trust\'s entries

31-Dec-17

Dr. Bad Debt Expense

73,027*

Cr. Allowance for Doubtful Accounts

73,027

31-Dec-18

Dr. Cash

11,000

Dr. Allowance for Doubtful Accounts

12,277

Cr. Interest Revenue

23,277

31-Dec-19

Dr. Cash

11,000

Dr. Allowance for Doubtful Accounts

13,750

Cr. Interest Revenue

24,750

Dr. Cash

220,000

Dr. Allowance for Doubtful Accounts

50,000

Cr. Interest Revenue

270,000

Working:

Pre-restructure carrying amount

PV of restructured cash flows

270,000

PV of $220,000 due in 2 years at 12%, interest payable annually

($220,000 * .79719)

175,382

PV of $11,000 interest payable annually for 2 years at 12%

($11,000 X 1.69005)

18,591

193,973

Creditor’s loss on restructuring of debt

-76,027

Date

Cash Interest

Effective interest

Increase in carrying amount

Carrying amount of note

31-Dec-17

193,973

31-Dec-18

11,000

23,277

12,277

206,250

31-Dec-19

11,000

24,750

13,750

220,000

220,000 * 0.5

11,000

193,973 * 12%

23,227

23,277 - 11,000

12,277

		Debit	Credit
	Vargo Corp.’s entries
31-Dec-17	Dr. Notes Payable	28,000
	Cr. Gain on Restructuring of Debt		28,000
31-Dec-18	Dr. Notes Payable	11,000
	Cr. Cash		11,000
	(5% * $220,000)
31-Dec-19	Dr. Notes Payable	231,000
	Cr. Cash		231,000
	220,000 + (5% * $220,000)
	First Trust\'s entries
31-Dec-17	Dr. Bad Debt Expense	73,027*
	Cr. Allowance for Doubtful Accounts		73,027
31-Dec-18	Dr. Cash	11,000
	Dr. Allowance for Doubtful Accounts	12,277
	Cr. Interest Revenue		23,277
31-Dec-19	Dr. Cash	11,000
	Dr. Allowance for Doubtful Accounts	13,750
	Cr. Interest Revenue		24,750
	Dr. Cash	220,000
	Dr. Allowance for Doubtful Accounts	50,000
	Cr. Interest Revenue		270,000