Debt Restructuring

Scofield Enterprises has a customer who purchased a software system for $10,000 and arranged to pay for the system over 60 months in an equal payment note. The owner of Scofield Enterprises sat down with your boss this week when she realized that the customer wasn't going to make his next payment. Their conversation is available atACCT 3310 Professional Application: Part 2provided below in this folder.

REQUIRED:

1. Download theProject 2 Spreadsheetand customize your project by entering your phone number on the Start Here worksheet.
2. Listen to and watch the conversation between the accountant and the owner atACCT 3310 - Professional Application: Part 2.
3. Use the information on theOriginal Debt Contractworksheet in theProject 2 Spreadsheetplus the information you gather from the owner / accountant's discussion to develop an amortization for the original debt contract. You should pay particular attention to the following issues

• When you calculate interest in a spreadsheet the number is accurate to fractions of a penny, but customers can only pay in pennies. Round the interest you calculate to the higher penny (to the advantage of your client) using the appropriate EXCEL function.
• Because interest and payment are both rounded numbers, the amortization table will not work out exactly to a final principal of 0. The final payment should be adjusted to exactly the amount needed to pay off the debt.

1. Then restructure the debt contract to lower the monthly payment. You should identify the features that you have changed between the original debt contract and then new debt contract and create a new amortization table based on the new principal, the new term of the debt, and the new interest rate. Use the EXCEL functionPMTto find the payment for your restructured debt contract. You will need to round interest payments to the next penny and set the final payment to exactly pay off the debt, as you did in (3) above.
2. GAAP requires that the lender record the value of the note on its books at the present value of the payments using the original interest rate (even if the interest rate is changed in the restructuring). Calculate the GAAP value of the restructured note.
3. Calculate the loss on note restructuring as the difference between the carrying value of note immediately before restructuring and the value you calculated in (5).
4. Prepare a memorandum in a separate WORD file to the owner that

• presents your recommended restructuring of the debt, supporting the changes you are making
• explains the amortization table of the restructured note and the loss on note restructuring.

NOTE: Each piece of numerical information should be entered into the workbook just once. You should use cell addresses in all subsequent formulas -- even to bring information from one worksheet to the next. Your workbook should be sufficiently integrated that a change to the number in the new debt contract will flow through to the final amortization table without your having to make any additional adjustments