Exercise 1424 On December 31 2017 American Bank enters into

Exercise 14-24 On December 31, 2017, American Bank enters into a debt restructuring agreement with Riverbed Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $2,800,000 note receivable by the following modifications: 1. Reducing the principal obligation from $2,800,000 to $1,860,000. 2· Extending the maturity date from December 31, 2017, to January 1, 2021. 3. Reducing the interest rate from 12% to 10%. Riverbed pays interest at the end of each year. On January 1, 2021, Riverbed Company pays $1,860,000 in cash to American Bank. Can Riverbed Company record a gain under this term modification? If yes, compute the gain for Riverbed Company. If no, enter amount as 0 The gain for Riverbed Company Prepare the journal entries to record the gain on Riverbed\'s books. (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.) Account Titles and Explanation Debit Credit What interest rate should Riverbed use to compute its interest expense in future periods? (Round answer to 0 decimal places, e.g. 18%.) The gain

Solution

Interest at the end of 31st Dec/2017           1,860,000.00 10%        186,000.00 Interest at the end of 31st Dec/2018           1,860,000.00 10%        186,000.00 Interest at the end of 31st Dec/2019           1,860,000.00 10%        186,000.00 Interest at the end of 31st Dec/2020           1,860,000.00 10%        186,000.00 Total Interest        744,000.00 Repayment of notes receivable     1,860,000.00 Total amount repayment     2,604,000.00 Notes Receivable Received     2,800,000.00 Gain on settlement        196,000.00 Journal entries to record gain Debit Credit Notes Payable              196,000.00 Gain on settlement      196,000.00 Interest Rate for future period is 10% Interest Payment Schedule Date Cash Paid Interest Expense Reduction of Carrying Amount Carrying Amount Note 31/12/2017                               -                186,000.00     2,604,000.00 31/12/2018              186,000.00              186,000.00    (186,000.00)     2,418,000.00 31/12/2019              186,000.00              186,000.00    (186,000.00)     2,232,000.00 31/12/2020              186,000.00              186,000.00    (186,000.00)     2,046,000.00 Interest Payment Entries Date Account Title & Explanations Debit Credit 01/01/2018 Interest Payable/Accrued Interest      186,000.00 Cash/Bank Account        186,000.00 Payment of interest expenses 31/12/2018 Interest Expense Account      186,000.00 Interest Payable/Accrued Interest        186,000.00 (Recognition of interest expenses) 01/01/2019 Interest Payable/Accrued Interest      186,000.00 Cash/Bank Account        186,000.00 Payment of interest expenses 31/12/2019 Interest Expense Account      186,000.00 Interest Payable/Accrued Interest        186,000.00 (Recognition of interest expenses) 01/01/2020 Interest Payable/Accrued Interest      186,000.00 Cash/Bank Account        186,000.00 Payment of interest expenses 31/12/2020 Interest Expense Account      186,000.00 Interest Payable/Accrued Interest        186,000.00 (Recognition of interest expenses) Journal Entry on 01/01/2021 01/01/2021 Account Title & Explanations Debit Credit Interest Payable/Accrued Interest      186,000.00 Notes Payable 1,860,000.00 Cash/Bank Account     2,046,000.00 Payment of interest and notes payable