Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 14: Q27E (page 759)

Vargo Corp. owes \(270,000 to First Trust. The debt is a 10-year, 12% note due December 31, 2017. Because Vargo Corp. is in financial trouble, First Trust agrees to extend the maturity date to December 31, 2019, reduce the principal to \)220,000, and reduce the interest rate to 5%, payable annually on December 31.

Instructions

  1. Prepare the journal entries on Vargo’s books on December 31, 2017, 2018, 2019.
  2. Prepare the journal entries on First Trust’s books on December 31, 2017, 2018, 2019.

Short Answer

Expert verified
  1. The total debit and credit side of Journal is $270,000.
  2. The total debit and credit side of the Journal is $394,054.

Step by step solution

01

Meaning of Journal Entry

A journal entry is a financial transaction recordthat is preserved in an organization's books of accounts.Debit and credit columns, as well as a description of each transaction, are included.

02

(a) Preparing journal entry

Becausethe carrying amount of the loan, $270,000, is more than the total anticipated cash flows, $242,000 [$220,000 + ($11,000 X 2)], a gain and a loss are recognized, and the debtor does not record interest.

Vargo Corp.’s entries

Date

Particulars

Debit ($)

Credit ($)

2017

Notes payable

28,000

Gain on the restructuring of debt

28,000

2018

Notes payable

11,000

Cash(5%×$220,000)

11,000

2019

Notes payable

231,000

Cash

[$220,000+5%×$220,000]

231,000

$270,000

$270,000

03

(b) Preparing journal entry

First Trust’s entries

Date

Particulars

Debit ($)

Credit ($)

Dec. 31, 2017

Bad debt expense

76,027

Allowances for doubtful accounts

76,027

Dec. 31, 2018

Cash

11,000

Allowance for doubtful accounts

12,277

Interest revenue

23,277

Dec. 31, 2019

Cash

11,000

Allowances for doubtful accounts

13,750

Interest revenue

24,750

Dec. 31, 2019

Cash

220,000

Allowance for doubtful accounts

50,000

Notes receivable

270,000

$394,054

$394,054

Working notes:

Calculation of creditors’ loss due to restructuring of debt

Pre-restructure carrying amount

$270,000

Present value of restructured cash flows:


Present value of $220,000 due in 2 years

At 12%, interest payable annually

(Table 6-2); ($220,000×0.79719)$175,382




Present value of $11,000 interest payable

Annually for 2 years at 12 % (Table 6-4);

$11,000×1.6900518,591



193,973

Creditor’s loss on restructuring of debt

$(76,027)

Preparing interest payment schedule

Date

Cash interest

Effective interest

Increase in

Carrying

Amount

Carrying

Amount of Note

12/31/17

$193,973

12/31/18

$11,000


($220,000×0.05)

$23,277

($193,973×12%)

$12,277

($23,277-$11,000)

206,250

12/31/19

11,000

24,750

13,750

220,000

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

E14-1 (L01) (Classification of Liabilities) Presented below are various account balances of K.D. Lang Inc.

(a) Unamortized premium on bonds payable, of which \(3,000 will be amortized during the next year.

(b) Bank loans payable of a winery, due March 10, 2021. (The product requires aging for 5 years before sale.)

(c) Serial bonds payable, \)1,000,000, of which \(200,000 are due each July 31.

(d) Amounts withheld from employees’ wages for income taxes.

(e) Notes payable due January 15, 2020.

(f) Credit balances in customers’ accounts arising from returns and allowances after collection in full of account.

(g) Bonds payable of \)2,000,000 maturing June 30, 2018.

(h) Overdraft of $1,000 in a bank account. (No other balances are carried at this bank.)

(i) Deposits made by customers who have ordered goods.

Instructions

Indicate whether each of the items above should be classified on December 31, 2017, as a current liability, a long-term liability, or under some other classification. Consider each one independently from all others; that is, do not assume that all of them relate to one particular business. If the classification of some of the items is doubtful, explain why in each case.

On April 1, 2017, Seminole Company sold 15,000 of its 11%, 15-year, \(1,000 face value bonds at 97. Interest payment dates are April 1 and October 1, and the company uses the straight-line method of bond discount amortization. On March 1, 2018, Seminole took advantage of favorable prices of its stock to extinguish 6,000 of the bonds by issuing 200,000 shares of its \)10 par value common stock. At this time, the accrued interest was paid in cash. The company’s stock was selling for $31 per share on March 1, 2018.

Instructions

Prepare the journal entries needed on the books of Seminole Company to record the following.

(a) April 1, 2017: issuance of the bonds.

(b) October 1, 2017: payment of semi-annual interest.

(c) December 31, 2017: accrual of interest expense.

(d) March 1, 2018: extinguishment of 6,000 bonds. (No reversing entries made.)

Question: How are gains and losses from extinguishment of a debt classified in the income statement? What disclosures are required of such transactions?

Question: What is the required method of amortizing discount and premium on bonds payable? Explain the procedures.

Matt Ryan Corporation is interested in building its own soda can manufacturing plant adjacent to its existing plant in Partyville, Kansas. The objective would be to ensure a steady supply of cans at a stable price and to minimize transportation costs. However, the company has been experiencing some financial problems and has been reluctant to borrow any additional cash to fund the project. The company is not concerned with the cash flow problems of making payments, but rather with the impact of adding additional long-term debt to its balance sheet.

The president of Ryan, Andy Newlin, approached the president of the Aluminum Can Company (ACC), its major supplier, to see if some agreement could be reached. ACC was anxious to work out an arrangement, since it seemed inevitable that Ryan would begin its own can production. The Aluminum Can Company could not afford to lose the account.

After some discussion, a two-part plan was worked out. First, ACC was to construct the plant on Ryan’s land adjacent to the existing plant. Second, Ryan would sign a 20-year purchase agreement. Under the purchase agreement, Ryan would express its intention to buy all of its cans from ACC, paying a unit price which at normal capacity would cover labor and material, an operating management fee, and the debt service requirements on the plant. The expected unit price, if transportation costs are taken into consideration, is lower than current market. If Ryan did not take enough production in any one year and if the excess cans could not be sold at a high enough price on the open market, Ryan agrees to make up any cash shortfall so that ACC could make the payments on its debt. The bank will be willing to make a 20-year loan for the plant, taking the plant and the purchase agreement as collateral. At the end of 20 years, the plant is to become the property of Ryan.

Instructions

  1. What are project financing arrangements using special-purpose entities?
  2. What are take-or-pay contracts?
  3. Should Ryan record the plant as an asset together with the related obligation?
  4. If not, should Ryan record an asset relating to the future commitment?
  5. What is meant by off-balance-sheet financing?
See all solutions

Recommended explanations on Business Studies Textbooks

Strategic Direction

Read Explanation

Managers

Read Explanation

Organizational Behavior

Read Explanation

Business Case Studies

Read Explanation

Introduction to Business

Read Explanation

Corporate Finance

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free