Using the same information as in E14-22, answer the following questions related to American Bank (creditor).

Instructions

1. What interest rate should American Bank use to calculate the loss on the debt restructuring?
2. Compute the loss that American Bank will suffer from the debt restructuring. Prepare the journal entry to record the loss.
3. Prepare the interest receipt schedule for American Bank after the debt restructuring.
4. Prepare the interest receipt entry for American Bank on December 31, 2019.
5. What entry should American Bank make on January 1, 2021?

Debt restructuring refers to a procedure adopted by a company struggling with cash flow crises to avoid bankruptcy and may agree with the lenders to renegotiate some flexible conditions.

American Bank should utilize the historical interest rate of 12 percent to determine the loss.

The loss can be calculated as follows:

Working note:

Calculation of Present value of principal $2,400,000 due in 3 years at 12%

$\begin{array}{c}\mathbf{Present}\mathbf{value}\mathbf{=}\mathbf{Principal}\mathbf{value}\mathbf{\times }\mathbf{PV}\mathbf{factor}\\ \mathbf{=}\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{400}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{0}\mathbf{.}\mathbf{71178}\\ \mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{708}\mathbf{,}\mathbf{272}\end{array}$

Calculation of Present value of interest $240,000 Paid annually for 3 years at 12%

$\begin{array}{c}\mathbf{Present}\mathbf{value}\mathbf{=}\mathbf{Principal}\mathbf{value}\mathbf{interest}\mathbf{\times }\mathbf{PV}\mathbf{factor}\\ \mathbf{=}\mathbf{\$}\mathbf{240}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{2}\mathbf{.}\mathbf{40183}\\ \mathbf{=}\mathbf{\$}\mathbf{576}\mathbf{,}\mathbf{439}\end{array}$

Calculation of Cash paid on 12/31/18

$\begin{array}{c}\mathbf{Cash}\mathbf{paid}\mathbf{=}\mathbf{Principal}\mathbf{obligation}\mathbf{\times }\mathbf{Interest}\mathbf{rate}\\ \mathbf{=}\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{400}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{10}\mathbf{\%}\\ \mathbf{=}\mathbf{\$}\mathbf{240}\mathbf{,}\mathbf{000}\end{array}$

Calculation of interest revenue on 12/31/18

$\begin{array}{c}\mathbf{Interest}\mathbf{revenue}\mathbf{=}\mathbf{Principal}\mathbf{obligation}\mathbf{\times }\mathbf{Interest}\mathbf{rate}\\ \mathbf{=}\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{284}\mathbf{,}\mathbf{711}\mathbf{\times }\mathbf{12}\mathbf{\%}\\ \mathbf{=}\mathbf{\$}\mathbf{274}\mathbf{,}\mathbf{165}\end{array}$

Calculation of increase in carrying amount on 12/31/18

$\begin{array}{c}\mathbf{Increase}\mathbf{in}\mathbf{carrying}\mathbf{amount}\mathbf{=}\mathbf{Cash}\mathbf{paid}\mathbf{-}\mathbf{Interest}\mathbf{expense}\\ \mathbf{=}\mathbf{\$}\mathbf{274}\mathbf{,}\mathbf{165}\mathbf{-}\mathbf{\$}\mathbf{240}\mathbf{,}\mathbf{000}\\ \mathbf{=}\mathbf{\$}\mathbf{34}\mathbf{,}\mathbf{165}\end{array}$

Note: The increase in carrying amount on 12/31/18 is rounded off at $2.

Interest receipt entry for American Bank is:

The receipt entry at maturity is: