Question

Jensen Homes purchased $160,000 of scaffolding from Lewisburg Builders Supply on January 2, 2017. Jensen paid $30,000 in cash and signed a three-year 10% note for the remaining $130,000 of the purchase price. The note specifies that payments of $26,000 plus interest be made each year on the anniversary date of the loan. Jensen made the required January 2, 2017 payment, but was unable to make the second payment on January 2, 2018 because of a downturn in the construction industry. At January 2, 2018, Jensen owed Lewisburg Builders Supply $104,000 plus $10,400 interest that had been accrued by both companies on December 31, 2017. Rather than write off the note, Lewisburg Builders Supply agreed to restructure the loan as follows: one payment of $95,000 on January 2, 2019 would satisfy the restructured note. The present value of $1 to be received n periods in the future = 1 ÷ (1 + r) n where r is the rate of interest per period.

Required:

Prepare the journal entries made by each company on January 2, 2018 to record the restructuring of the note.

Answer 1

Entry in books of Jensen Homes
Date	General Journal	Debit	Credit
Jan 2,2018	Notes payable	$     104,000
	Accrued Interest	$      10,400
	Notes Payable- restructured		$     95,000
	Gain on debt restructuring		$     19,400
Entry in Books of Lewisberg builders
	Bad Debts Expenses	$      28,036
	Allowance for Doubtful accounts		$     28,036

Workings
	Prestructuring carrying amount of note	$     114,400
	Less: present value of restructured cash flow
	present value of $95000 due in 1 year	$      86,365
	(95000*.9091)
	Loss	$      28,036