E14-21 Term Modification without Gain-Debtor's Entries

E14-21

(Term Modification without Gain-Debtor's Entries)

On December 31, 2010, the American Bank enters into a debt restructuring agreement with Barkley Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $3,000,000 note receivable by the following modifications: 

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 recorded by American Bank under the debt restructuring? 




(b) Can Barkley Company record a gain under the term modification mentioned above? 




(c) Assuming that the interest rate Barkley should use to compute interest expense in future periods is 1.4276%, prepare the interest payment schedule of the note for Barkley Company after the debt restructuring. (Round answers to 0 decimal places, e.g. 15,250. Use the rounded amounts in calculating each subsequent entry. In using your calculator, you must be sure that rounded amounts are in the calculator'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 on December 31, 2012. (List multiple debit/credit entries from largest to 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 Woods Corporation. The following information pertains to this lease. 

The term of the noncancelable lease is 6 years, with no renewal option. The equipment reverts to the lessor at the termination of the lease.
Equal rental payments are due on January 1 of each year, beginning in 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 unguaranteed residual value of $10,000. Woods depreciates all of its equipment on 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 of the lessor is unknown.
Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by the lessor. 
Instructions
(Both the lessor and the lessee's accounting period ends on December 31.)

(a) Answer the following questions.

What type of lease is recorded by Palmer? Capital LeaseOperating Lease

What type of lease is recorded by Woods? Operating LeaseCapital Lease

(b) Calculate the amount of the annual rental payment. (Round your answer 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 Capital LeasesInterest PayableLease LiabilityDepreciation ExpenseCost of Goods SoldLease ReceivableAccumulated DepreciationCashSalesInventoryInterest ReceivableInterest RevenueEquipment $ 
InventoryInterest PayableLease LiabilitySalesLease ReceivableCost of Goods SoldInterest ReceivableInterest RevenueEquipmentLeased Equipment Under Capital LeasesDepreciation ExpenseCashAccumulated DepreciationInterest Expense $
(To record the lease) 
Interest ReceivableLease LiabilityAccumulated DepreciationInterest RevenueEquipmentLeased Equipment Under Capital LeasesCashDepreciation ExpenseInterest ExpenseInterest PayableInventoryCost of Goods SoldLease ReceivableSales $ 
Depreciation ExpenseLeased Equipment Under Capital LeasesSalesAccumulated DepreciationInterest RevenueInterest ReceivableInterest ExpenseInventoryEquipmentCashLease ReceivableLease LiabilityCost of Goods SoldInterest Payable $ 
(To record lease payment) 
12/31/11 Interest RevenueCashInterest ExpenseAccumulated DepreciationInterest PayableEquipmentLease ReceivableSalesDepreciation ExpenseInterest ReceivableCost of Goods SoldLeased Equipment Under Capital LeasesLease LiabilityInventory $ 
Interest ExpenseLeased Equipment Under Capital LeasesEquipmentInterest PayableAccumulated DepreciationInventoryLease LiabilitySalesLease ReceivableCashCost of Goods SoldInterest ReceivableInterest RevenueDepreciation Expense $ 
(To record depreciation) 
Interest ExpenseLease ReceivableLease LiabilityLeased Equipment Under Capital LeasesSalesInterest PayableInterest RevenueCost of Goods SoldInventoryCashInterest ReceivableEquipmentDepreciation ExpenseAccumulated Depreciation $ 
Lease ReceivableLease LiabilityInterest RevenueAccumulated DepreciationCost of Goods SoldCashInterest ExpenseLeased Equipment Under Capital LeasesEquipmentInterest PayableDepreciation ExpenseSalesInventoryInterest 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 to smallest eg 10, 5, 3, 2. Round your answer to the nearest dollar eg 58,971.)

Date Description Debit Credit 
1/1/11 Interest RevenueInterest ReceivableCashSalesCost of Goods SoldInventoryEquipmentLease ReceivableAccumulated DepreciationLeased Equipment Under Capital LeasesLease LiabilityDepreciation ExpenseInterest ExpenseInterest Payable $ 
Interest ExpenseSalesEquipmentCost of Goods SoldInterest ReceivableLeased Equipment Under Capital LeasesInterest PayableInventoryLease LiabilityCashLease ReceivableDepreciation ExpenseInterest RevenueAccumulated Depreciation $ 
Interest PayableInterest RevenueEquipmentCost of Goods SoldInterest ExpenseSalesInventoryInterest ReceivableLeased Equipment Under Capital LeasesLease LiabilityCashDepreciation ExpenseLease ReceivableAccumulated Depreciation $ 
SalesInterest ExpenseLeased Equipment Under Capital LeasesInventoryInterest ReceivableEquipmentLease LiabilityCashDepreciation ExpenseAccumulated DepreciationLease ReceivableInterest PayableCost of Goods SoldInterest Revenue $
(To record the lease) 
Leased Equipment Under Capital LeasesLease LiabilityEquipmentInterest ReceivableInterest ExpenseSalesCashInventoryInterest RevenueDepreciation ExpenseLease ReceivableAccumulated DepreciationCost of Goods SoldInterest Payable $ 
EquipmentInterest ExpenseInterest PayableInventoryLeased Equipment Under Capital LeasesInterest ReceivableSalesCost of Goods SoldAccumulated DepreciationLease ReceivableLease LiabilityInterest RevenueCashDepreciation Expense $ 
(To record lease payment) 
12/31/11 Depreciation ExpenseLease ReceivableSalesLeased Equipment Under Capital LeasesAccumulated DepreciationCashLease LiabilityInterest PayableInterest ExpenseInterest ReceivableCost of Goods SoldInventoryInterest RevenueEquipment $ 
Interest RevenueCost of Goods SoldLeased Equipment Under Capital LeasesCashSalesInterest ReceivableInventoryEquipmentInterest PayableLease LiabilityDepreciation ExpenseAccumulated DepreciationInterest ExpenseLease Receivable $ 
(To record the interest)




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