Question
On December 31, 2017, ABC enters into a debt restructuring agreement with GG Bank. The bank...
On December 31, 2017, ABC enters into a debt restructuring
agreement with GG Bank. The bank agrees to restructure a 6.75%
(issued at par) $30,000,000 bond by making the following
modifications:
1. reducing the principal obligation from $30,000,000 to
$24,000,000.
2. extending the maturity date from December 31, 2017, to January
1, 2027.
3. reducing the interest rate from 6.75% to 6.00%. ABC’s market
interest rate is currently 15% due to its risk profile, i.e.
declining revenue and earnings.
Market Rateis 15%. Assume that on January 1, 2027, ABC repays the
loan in full by paying $24,000,000 to DP Bank.
| Interest | Discount | Carrying | ||
| Date | Cash Paid | Expense | Amortized | Amount |
| Dec. 31, 2017 | $ 13,693,379 | |||
| Dec. 31, 2018 | $ 1,440,000 | $ 2,054,007 | $ 614,007 | 14,307,386 |
| Dec. 31, 2019 | 1,440,000 | 2,146,108 | 706,108 | 15,013,494 |
| Dec. 31, 2020 | 1,440,000 | 2,252,024 | 812,024 | 15,825,518 |
| Dec. 31, 2021 | 1,440,000 | 2,373,828 | 933,828 | 16,759,345 |
| Dec. 31, 2022 | 1,440,000 | 2,513,902 | 1,073,902 | 17,833,247 |
| Dec. 31, 2023 | 1,440,000 | 2,674,987 | 1,234,987 | 19,068,234 |
| Dec. 31, 2024 | 1,440,000 | 2,860,235 | 1,420,235 | 20,488,470 |
| Dec. 31, 2025 | 1,440,000 | 3,073,270 | 1,633,270 | 22,121,740 |
| Dec. 31, 2026 | 1,440,000 | 3,318,260 | 1,878,260 | 24,000,000 |
| Jan. 01, 2017 | $ 12,960,000 | $ 23,266,621 | $ 10,306,621 | |
a) Prepare the interest payment entry for borrower on December
31, 2018.
b) What entry would borrower make on January 1, 2027?
Homework Answers
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