| Question 3 |
 |
On December 31, 2012, the American Bank enters into a debt restructuring agreement with Barkley Company, which is now experiencing financial trouble. The bank agrees to restructure a13%, issued at par, $3,109,000note receivable by the following modifications:
| 1. |
|
Reducing the principal obligation from $3,109,000 to $2,487,200. |
| 2. |
|
Extending the maturity date from December 31, 2012, to January 1, 2016. |
| 3. |
|
Reducing the interest rate from13% to10%. |
Barkley pays interest at the end of each year. On January 1, 2016, Barkley Company pays $2,487,200in cash to Firstar Bank.
(a)Will the gain recorded by Barkley be equal to the loss recorded by American Bank under the debt restructuring?NoYes
(b)Can Barkley Company record a gain under the term modification mentioned above?NoYes
(c)Assuming that the interest rate Barkley should use to compute interest expense in future periods is 1.4276%, prepare the interest payment schedule of the note for Barkley Company after the debt restructuring.(Round answers to 0 decimal places, e.g. $38,548.)
BARKLEY COMPANY
Interest Payment Schedule After Debt Restructuring
Effective Interest Rate |
| Date |
|
Cash
Paid |
|
Interest
Expense |
|
Reduction
of Carrying
Amount |
|
Carrying
Amount of
Note |
|
| 12/31/12 |
|
$ |
|
$ |
|
$ |
|
$ |
|
| 12/31/13 |
|
|
|
|
|
|
|
|
|
| 12/31/14 |
|
|
|
|
|
|
|
|
|
| 12/31/15 |
|
|
|
|
|
|
|
|
* |
| Total |
|
$ |
|
$ |
|
$ |
|
|
|
*Difference due to rounding
(d)Prepare the interest payment entry for Barkley Company on December 31, 2014.(Round answers to 0 decimal places, e.g. $38,548. Credit account titles are automatically indented when amount is entered. Do not indent manually.)
| Account Titles and Explanation |
Debit |
Credit |
|
|
|
|
|
|
|
|
|
(e)What entry should Barkley make on January 1, 2016?(Round answers to 0 decimal places, e.g. $38,548. Credit account titles are automatically indented when amount is entered. Do not indent manually.)
| Account Titles and Explanation |
Debit |
Credit |
|
|
|
|
|
|
On January 1, 2012, Palmer Company leased equipment to Woods Corporation. The following information pertains to this lease.
| 1. |
|
The term of the noncancelable lease is6years, with no renewal option. The equipment reverts to the lessor at the termination of the lease. |
| 2. |
|
Equal rental payments are due on January 1 of each year, beginning in 2012. |
| 3. |
|
The fair value of the equipment on January 1, 2012, is $225,100, and its cost is $180,080. |
| 4. |
|
The equipment has an economic life of 8 years, with an unguaranteed residual value of $11,000. Woods depreciates all of its equipment on a straight line basis. |
| 5. |
|
Palmer sets the annual rental to ensure an10% rate of return. Woods’s incremental borrowing rate is11%, and the implicit rate of the lessor is unknown. |
| 6. |
|
Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by the lessor. |
(Both the lessor and the lessee’s accounting period ends on December 31.)
|
