E14-21
(Term Modification without Gain-Debtor’s Entries)
On December 31, 2010, the American Bank enters into a debtrestructuring agreement with Barkley Company, which is nowexperiencing financial trouble. The bank agrees to restructure a12%, issued at par, $3,000,000 note receivable by the followingmodifications:
Reducing the principal obligation from $3,000,000 to$2,400,000.
Extending the maturity date from December 31, 2010, to December 31,2013.
Reducing the interest rate from 12% to 10%.
Barkley pays interest at the end of each year. On January 1, 2014,Barkley Company pays $2,400,000 in cash to American Bank.
(a) Will the gain recorded by Barkley be equal to the loss recordedby American Bank under the debt restructuring?
(b) Can Barkley Company record a gain under the term modificationmentioned above?
(c) Assuming that the interest rate Barkley should use to computeinterest expense in future periods is 1.4276%, prepare the interestpayment schedule of the note for Barkley Company after the debtrestructuring. (Round answers to 0 decimal places, e.g. 15,250. Usethe rounded amounts in calculating each subsequent entry. In usingyour calculator, you must be sure that rounded amounts are in thecalculator’s memory.)
BARKLEY COMPANY
Interest Payment Schedule After Debt Restructuring
Effective-Interest Rate 1.4276%
Date Cash Paid
(10%)
Interest Expense
(1.4276%)
Reduction
of Carrying Amount
Carrying
Amount of Note
12/31/10 $
12/31/11 $ $ $
12/31/12
12/31/13
*37,159
Total $
$
$
*This number as been adjusted upward from the calculated amount by$1 due to rounding in prior entries.
(d) Prepare the interest payment entry for Barkley Company onDecember 31, 2012. (List multiple debit/credit entries from largestto smallest amount, e.g. 10, 5, 2.)
Description/Account Debit Credit
December 31, 2012
(e) What entry should Barkley make on January 1, 2014?
Description/Account Debit Credit
January 1, 2014
E21-7
(Lessee-Lessor Entries; Sales-Type Lease)
On January 1, 2011, Palmer Company leased equipment to WoodsCorporation. The following information pertains to this lease.
The term of the noncancelable lease is 6 years, with no renewaloption. The equipment reverts to the lessor at the termination ofthe lease.
Equal rental payments are due on January 1 of each year, beginningin 2011.
The fair value of the equipment on January 1, 2011, is $200,000,and its cost is $150,000.
The equipment has an economic life of 8 years, with an unguaranteedresidual value of $10,000. Woods depreciates all of its equipmenton a straight-line basis.
Palmer set the annual rental to ensure an 11% rate of return.Woods’s incremental borrowing rate is 12%, and the implicit rate ofthe lessor is unknown.
Collectibility of lease payments is reasonably predictable, and noimportant uncertainties surround the amount of costs yet to beincurred by the lessor.
Instructions
(Both the lessor and the lessee’s accounting period ends onDecember 31.)
(a) Answer the following questions.
What type of lease is recorded by Palmer? Capital LeaseOperatingLease
What type of lease is recorded by Woods? Operating LeaseCapitalLease
(b) Calculate the amount of the annual rental payment. (Round youranswer to the nearest dollar eg 58,971.)
$
(c) Prepare all the necessary journal entries for Woods for 2011.(Round your answer to the nearest dollar eg 58,971.)
Date Description Debit Credit
1/1/11 Interest ExpenseLeased Equipment Under CapitalLeasesInterest PayableLease LiabilityDepreciation ExpenseCost ofGoods SoldLease ReceivableAccumulatedDepreciationCashSalesInventoryInterest ReceivableInterestRevenueEquipment $
InventoryInterest PayableLease LiabilitySalesLease ReceivableCostof Goods SoldInterest ReceivableInterest RevenueEquipmentLeasedEquipment Under Capital LeasesDepreciation ExpenseCashAccumulatedDepreciationInterest Expense $
(To record the lease)
Interest ReceivableLease LiabilityAccumulated DepreciationInterestRevenueEquipmentLeased Equipment Under CapitalLeasesCashDepreciation ExpenseInterest ExpenseInterestPayableInventoryCost of Goods SoldLease ReceivableSales $
Depreciation ExpenseLeased Equipment Under CapitalLeasesSalesAccumulated DepreciationInterest RevenueInterestReceivableInterest ExpenseInventoryEquipmentCashLeaseReceivableLease LiabilityCost of Goods SoldInterest Payable $
(To record lease payment)
12/31/11 Interest RevenueCashInterest ExpenseAccumulatedDepreciationInterest PayableEquipmentLeaseReceivableSalesDepreciation ExpenseInterest ReceivableCost of GoodsSoldLeased Equipment Under Capital LeasesLease LiabilityInventory$
Interest ExpenseLeased Equipment Under CapitalLeasesEquipmentInterest PayableAccumulatedDepreciationInventoryLease LiabilitySalesLease ReceivableCashCostof Goods SoldInterest ReceivableInterest RevenueDepreciationExpense $
(To record depreciation)
Interest ExpenseLease ReceivableLease LiabilityLeased EquipmentUnder Capital LeasesSalesInterest PayableInterest RevenueCost ofGoods SoldInventoryCashInterest ReceivableEquipmentDepreciationExpenseAccumulated Depreciation $
Lease ReceivableLease LiabilityInterest RevenueAccumulatedDepreciationCost of Goods SoldCashInterest ExpenseLeased EquipmentUnder Capital LeasesEquipmentInterest PayableDepreciationExpenseSalesInventoryInterest Receivable $
(To record the interest)
(d) Prepare all the necessary journal entries for Palmer for 2011.(For multiple debit/credit entries, list amounts from largest tosmallest eg 10, 5, 3, 2. Round your answer to the nearest dollar eg58,971.)
Date Description Debit Credit
1/1/11 Interest RevenueInterest ReceivableCashSalesCost of GoodsSoldInventoryEquipmentLease ReceivableAccumulatedDepreciationLeased Equipment Under Capital LeasesLeaseLiabilityDepreciation ExpenseInterest ExpenseInterest Payable $
Interest ExpenseSalesEquipmentCost of Goods SoldInterestReceivableLeased Equipment Under Capital LeasesInterestPayableInventoryLease LiabilityCashLease ReceivableDepreciationExpenseInterest RevenueAccumulated Depreciation $
Interest PayableInterest RevenueEquipmentCost of Goods SoldInterestExpenseSalesInventoryInterest ReceivableLeased Equipment UnderCapital LeasesLease LiabilityCashDepreciation ExpenseLeaseReceivableAccumulated Depreciation $
SalesInterest ExpenseLeased Equipment Under CapitalLeasesInventoryInterest ReceivableEquipmentLeaseLiabilityCashDepreciation ExpenseAccumulated DepreciationLeaseReceivableInterest PayableCost of Goods SoldInterest Revenue $
(To record the lease)
Leased Equipment Under Capital LeasesLeaseLiabilityEquipmentInterest ReceivableInterestExpenseSalesCashInventoryInterest RevenueDepreciation ExpenseLeaseReceivableAccumulated DepreciationCost of Goods SoldInterestPayable $
EquipmentInterest ExpenseInterest PayableInventoryLeased EquipmentUnder Capital LeasesInterest ReceivableSalesCost of GoodsSoldAccumulated DepreciationLease ReceivableLease LiabilityInterestRevenueCashDepreciation Expense $
(To record lease payment)
12/31/11 Depreciation ExpenseLease ReceivableSalesLeased EquipmentUnder Capital LeasesAccumulated DepreciationCashLeaseLiabilityInterest PayableInterest ExpenseInterest ReceivableCost ofGoods SoldInventoryInterest RevenueEquipment $
Interest RevenueCost of Goods SoldLeased Equipment Under CapitalLeasesCashSalesInterest ReceivableInventoryEquipmentInterestPayableLease LiabilityDepreciation ExpenseAccumulatedDepreciationInterest ExpenseLease Receivable $
(To record the interest)
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