Question

On December 31, 2017, Federal Bank enters into a debt restructuring agreement with Carson Company which...

On December 31, 2017, Federal Bank enters into a debt restructuring agreement with Carson Company which is experiencing financial difficulties. The bank restructures a $6,000,000 note receivable by:

1. Reducing the principal obligation from $6,000,000 to $5,000,000.

2. Extending the maturity date from 12/31/17 to 12/31/20, and

3.Reducing the interest rate from 12% to 6%.

Interest has been paid up to date as of 12/31/17.

Instructions: Discuss the nature of this transaction, indicating whether any gain or loss is recognized by either party and preparing any 12/31/17 journal entries that may be required by the debtor (Carson).

Homework Answers

Answer #1

The transaction gives rise to loss for Federal bank since the Present value of future cashflows from the restructured debt is lower than the existing debt. Therefore the Bank needs to reccord the loss of $1,720,551 in its books on 31st December, 2017.

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