Kathleen Lowell Bank
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On December 31, 2004, Kathleen Lowell Bank enters into a debt restructuring agreement with Dennis Company which is experiencing financial difficulties. The bank restructures a $4,000,000 note receivable by:
1. Reducing the principal obligation from $4,000,000 to $3,200,000.
2. Extending the maturity date from 12/31/04 to 12/31/07, and
3. Reducing the interest rate from 12% to 6%.
Interest has been paid up to date as of 12/31/04.
Instructions
Discuss the nature of this transaction, indicating whether any gain or loss is recognized by either party and preparing any 12/31/04 journal entries that may be required by the debtor (Dennis).
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Solution Summary
This solution is comprised of a detailed explanation to discuss the nature of this transaction, indicating whether any gain or loss is recognized by either party and preparing any 12/31/04 journal entries that may be required by the debtor (Dennis).
Solution Preview
There are two ways in which borrowers and lenders handle troubled debt. Two primary ways are (1) the borrower and lender can agree to settle the debt (the borrower transfers assets or its own stock to settle the debt), or (2) the borrower and lender can agree to modify the terms of the debt (restructure the debt). It is the nature of a settlement transaction that borrowers agree to the settlement only if the fair market value of the assets/stock issued in a settlement is less than current book value (resulting in ...
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