Question:
At January 1, 2013, NCI Industries, Inc. was indebted to First Federal Bank under a $240,000, 10%
unsecured note. The note was signed January 1, 2011, and was due December 31, 2014. Annual interest
was last paid on
December 31, 2011. NCI was experiencing severe financial difficulties and negotiated a restructuring of
the terms of the debt agreement. First Federal agreed to reduce last year’s interest and the remaining two
years’ interest payments to $11,555 each and delay all payments until December 31, 2014, the maturity
date.
Required:
Prepare the journal entries by First Federal Bank necessitated by the restructuring of the debt at
1. January 1, 2013.
2. December 31, 2013.
3. December 31, 2014.
Answer:
ANALYSIS
Previous Value:
Accrued 2012 interest (10% x $240,000) $ 24,000
Principal 240,000
Carrying amount of the receivable $264,000
New Value:
$11,555 + 11,555 + 11,555 + 240,000 = $274,665
$274,665 x 0.82645 * = (226,997)
Loss: $ 37,003
At January 1, 2013, NCI Industries, Inc. was indebted to First Federal Bank under a $240,000, 10%
unsecured note. The note was signed January 1, 2011, and was due December 31, 2014. Annual interest
was last paid on
December 31, 2011. NCI was experiencing severe financial difficulties and negotiated a restructuring of
the terms of the debt agreement. First Federal agreed to reduce last year’s interest and the remaining two
years’ interest payments to $11,555 each and delay all payments until December 31, 2014, the maturity
date.
Required:
Prepare the journal entries by First Federal Bank necessitated by the restructuring of the debt at
1. January 1, 2013.
2. December 31, 2013.
3. December 31, 2014.
Answer:
ANALYSIS
Previous Value:
Accrued 2012 interest (10% x $240,000) $ 24,000
Principal 240,000
Carrying amount of the receivable $264,000
New Value:
$11,555 + 11,555 + 11,555 + 240,000 = $274,665
$274,665 x 0.82645 * = (226,997)
Loss: $ 37,003
