Question :

On December 31, 2012, the American Bank enters into a debt reformation agreement with Barkley Company, which is now experiencing financial trouble. The bank agrees to restructure a 13 percent, issued at par, $3,045,000 note receivable by the subsequent modifications:

1. Reducing the principal obligation from $3,045,000 to $2,436,000.

2. Extending the maturity date from December 31, 2012, to January 1, 2016.

3. Reducing the interest rate from 13% to 11%.

Barkley pays interest at the end of each year. On 1^st January, 2016, Barkley Company pays $2,436,000 in cash to Firstar Bank.

(a) Will the profit recorded by Barkley be equal to the loss recorded by American Bank under the debt restructuring?

(b) Will Barkley Company record a profit under the term modification mentioned above?

(c) Considering that the interest rate Barkley should use to evaluate interest expense in future periods is 1.4276%, arrange the interest payment schedule of the note for Barkley Company after the debt restructuring.

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) Organize the interest payment entry for Barkley Company on 31^st December, 2014. Credit account titles are indented when amount is entered. Do not indent manually.)

Account Titles and Explanation

Debit

Credit

(e) What entry could Barkley make on January 1, 2016?

Account Titles and Explanation

Debit

Credit

Show List of Accounts