Chapter 14: 3IFRS (page 718)
Describe the two criteria for determining the valuation of financial assets.
Managing and cash flow are two criteria for the valuation of financial assets.
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Question: (Debtor/Creditor Entries for Continuation of Troubled Debt with New Effective Interest)
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, 2017. Because Crocker Corp. is in financial trouble, D. Yaeger Corp. agrees to forgive the accrued interest, \(30,000 of the principal, and to extend the maturity date to December 31, 2020. Interest at 10% of revised principal will continue to be due on 12/31 each year.
Assume the following present value factors for 3 periods.
Single sum | 0.93543 | 0.93201 | 0.92589 | 0.92521 | 0.92184 | 0.91514 |
Ordinary annuity of 1 | 2.86989 | 2.86295 | 2.85602 | 2.84913 | 2.84226 | 2.82861 |
Instructions
(a) Compute the new effective-interest rate for Crocker Corp. following restructure. (Hint: Find the interest rate that establishes approximately \)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 2017 through 2020.
(c) Compute the gain or loss for D. Yaeger Corp. and prepare a schedule of receivable reduction and interest revenue for the years 2017 through 2020.
(d) Prepare all the necessary journal entries on the books of Crocker Corp. for the years 2017, 2018, and 2019.
(e) Prepare all the necessary journal entries on the books of D. Yaeger Corp. for the years 2017, 2018, and 2019.
Question: (Restructure of Note under Different Circumstances) Halvor Corporation is having financial difficulty and therefore has asked Frontenac National Bank to restructure its \(5 million note outstanding. The present note has 3 years remaining and pays a current rate of interest of 10%. The present market rate for a loan of this nature is 12%. The note was issued at its face value.
Instructions
The following are four independent situations. Prepare the journal entry that Halvor and Frontenac National Bank would make for each of these restructurings.
(a) Frontenac National Bank agrees to take an equity interest in Halvor by accepting common stock valued at \)3,700,000 in exchange for relinquishing its claim on this note. The common stock has a par value of \(1,700,000.
(b) Frontenac National Bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book value of \)3,250,000 and a fair value of \(4,000,000.
(c) Frontenac National Bank agrees to modify the terms of the note, indicating that Halvor does not have to pay any interest on the note over the 3-year period.
(d) Frontenac National Bank agrees to reduce the principal balance due to \)4,166,667 and require interest only in the second and third year at a rate of 10%.
(Amortization Schedule—Straight-Line) Devon Harris Company sells 10% bonds having a maturity value of \(2,000,000 for \)1,855,816. The bonds are dated January 1, 2017, and mature January 1, 2022. Interest is payable annually on January 1.
Instructions
Set up a schedule of interest expense and discount amortization under the straight-line method. (Round answers to the nearest cent.)
Find the polynomials such that
(a) In a troubled-debt situation, why might the creditor grant concessions to the debtor?
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