Chino Valley has recently been experiencing cash flow problems due to a poor projection of expected sales during the past year. Chino Valley markets preserved produce in various forms. At the beginning of the fiscal year 19X8, Chino Valley expanded its product line to include various flavors of rice cakes and meat substitutes made from soybeans. Market research had determined that the average consumer had become more health conscious and would purchase this type of product. In addition, government subsidies had substantially increased the price of meats to a point where economic theory indicated that consumers would start switching to meat substitute products. However, sales of the products have lagged far behind expectations. The marketing department still believes that the products will sell well eventually. In the meantime, Chino Valley has had to suspend payment on the debts incurred to develop the new product line. This debt is held by The Yavapai County Bank. The bank has three major notes outstanding with Chino Valley. Neither the bank nor Chino Valley wishes to enter bankruptcy reorganization or liquidation proceedings. Instead, the bank has agreed to restructure the debts.
The first note is for $200,000 with interest at 10%, dated July 1, 19X7. Interest payments are due semiannually. Six months of interest is past due. Principal payments were not due to start until the beginning of 19X8, but Chino Valley will be unable to make any such payments in the near future. The Yavapai County Bank has agreed to accept a piece of land held for a possible future plant site in exchange for the note and past due interest. The land has been carried on the books of Chino Valley at $90,000 for the past seven years. Its current market value is $160,000. The note was restructured on 1/1/X8.
The second note is for $750,000, with interest at 15% dated January 1, 19X8. Interest and principal payments have not been made for the first six months. The Yavapai County Bank is willing to accept 100,000 shares of Chino Valleys' common stock, par value $2, current market value $7, because the value of the shares was $9 when Chino Valley first marketed its new product line. The price fell to $7 as the market became aware of Chino Valley's financial problems in the last quarter of this year. The bank believes that the stock will return to its previous level after the debts have been renegotiated and the new product line begins to sell. The note was restructured on 6/30/X8.
The third note is for $2,000,000, with interest at 12%, dated January 1, 19X8. The term is two years with principal to be repaid at the end of that time. Interest is payable every six months. Chino Valley has informed the bank that it will not be able to make any interest payments in the next year and will not be able to repay the principal in two years. Accordingly, the bank has agreed to modify the terms of the loan. The maturity date of the note is extended to five years. No interest payments will be due on the note for the first and second years. Interest payments of 6% will be due at the end of year 3, 9% at the end of year 4 and 12% at the end of year 5 along with the repayment of the principal. The note was restructured on 6/30/X8.
Required:
Explain how each of these debts should be reported on the financial statements of both Chino Valley and The Yavapai County Bank over the life of the loans. Provide the journal entries that will take place on each set of books as a result of the restructuring. Include accredited sources such as the ASC, SFAS, etc.