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Prepare journal entries for restructured long-term debt

Your company is in financial trouble and is in the process of reorganizing. Your manager wants to know how you will report on restructuring the debt. Use the following information to help with this assignment.

This is the liability section of your company's balance sheet:

Accounts payable $972,160
Accrued liabilities 2,071,270
Accrued claims costs 793,620
Federal and other income taxes 19,710
Deferred income taxes 500
Current maturities of long-term debt and
capital lease obligations 50,610
Short-term borrowings 249,250
Total Current Liabilities 4,157,120
Capital lease obligation 54,580
Note outstanding 3,000,000
Mortgage outstanding 608,030
Other liabilities 95,860
Total long-term liabilities 3,758,470
Total Liabilities 7,915,590

Your company has asked the bank to restructure its $3 million note outstanding. The present note has 3 years remaining and pays a current interest rate of 10%. The present market rate for a loan of this nature is 12%. The note was issued at its face value. The bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book value of $1,950,000 and a fair value of $2,400,000.

Prepare journal entries for debt restructuring.

Solution Preview

The essence of this transaction is a sale of land in exchange for existing debt, also called an asset swap.

First the asset is brought up to fair market value and any gain is recorded as income:

Debit: Land $450,000 (The ...

Solution Summary

The solution explains the transaction including presenting the journal entries which would be made to effect the restructure of debt.