P 14-14 Crocker Corp. owes D. Yaeger Corp. a 10-year, 10% note in the amount of $330,000 plus $33,000 of accrued interest. The note is due today, December 31, 2014. Because Crocker Corp. is in financial trouble, D. Yaeger Corp. agrees to forgive the accrued interest, $30,000 of the principal, and to extend the maturity date to December 31, 2017. Interest at 10% of revised principal will continue to be due on 12/31 each year.
Assume the following present value factors for 3 periods.
21/4% 23/8% 21/2% 25/8% 23/4% 3%
Single sum .93543 .93201 .92859 .92521 .92184 .91514
Ordinary annuity of 1 2.86989 2.86295 2.85602 2.84913 2.84226 2.82861
Instructions
(a) Compute the new effective-interest rate for Crocker Corp. following restructure. (Hint: Find the interest rate that establishes approximately $363,000 as the present value of the total future cash flows.)
(b) Prepare a schedule of debt reduction and interest expense for the years 2014 through 2017.
(c) Compute the gain or loss for D. Yaeger Corp. and prepare a schedule of receivable reduction and interest revenue for the years 2014 through 2017.
(d) Prepare all the necessary journal entries on the books of Crocker Corp. for the years 2014, 2015, and 2016.
(e) Prepare all the necessary journal entries on the books of D. Yaeger Corp. for the years 2014, 2015, and 2016.
Carrying amount of the debt at date of restructure, $330,000 + $33,000 = $363,000. Total future cash flow, $300,000 + ($300,000 X .10 X 3) = $390,000. Because the future cash flow exceeds the carrying amount of the debt, no gain is recognized at the date of restructure.