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Debtor Corp owes Friendly Bank $90,000 on a 5% interest-bearing non-amortizing note payable in five years, plus accrued and unpaid interest, due immediately, of $4,500. Friendly Bank agrees to a restructuring to assist Debtor Corp, which is suffering losses and is threatening to declare bankruptcy. The interest rate is reduced to 4%, the principal is reduced to $72,500 and the accrued interest is forgiven outright. Future payments will be on normal terms. Original market/effective interest rate is 12%. Discuss the accounting treatment.
Well, no, I’m not going to discuss the accounting treatment!
You must have got this question from a text book (I know that you haven’t made it up!) and that text book must have provided a solution to this question
Now, if you have a problem with the text book explanation, type out the part of the answer about which you are not happy and I’ll try to explain that part
Ok?
Hi Mike,
Actually I got it from my lecturer but she hasn’t provided the answers. Ive tried to search for the question hoping to find the answer online but to no avail.
I suppose this has something to do with impairment and there would be a write down on carrying amount of the note payable.
I dont really follow the question when it says the interest rate is reduced to 4% and accrued interest is forgiven outright. So, I thought I’d get that when I see the answer.
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