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EXERCISE 14-22 - 715,289(c The interest receipt schedule is...

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EXERCISE 14-22 (25–30 minutes) (a) The American Bank should use the historical interest rate of 12% to calculate the loss. (b) The loss is computed as follows: Pre-restructuring carrying amount of note $3,000,000 Less: Present value of restructured future cash flows: Present value of principal $2,400,000 due in 3 years at 12% $1,708,272 a Present value of interest $240,000 paid annually for 3 years at 12% 576,439 b 2,284,711 Loss on debt restructuring $ 715,289 a $2,400,000 X .71178 = $1,708,272. b $240,000 X 2.40183 = $576,439. December 31, 2010 Bad Debt Expense ............................................... 715,289 Allowance for Doubtful Accounts
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Unformatted text preview: ........... 715,289 (c) The interest receipt schedule is prepared as follows: AMERICAN BANK Interest Receipt Schedule After Debt Restructuring Effective-Interest Rate 12% Date Cash Received (10%) Interest Revenue (12%) Increase in Carrying Amount Carrying Amount of Note 12/31/10 $2,284,711 12/31/11 $240,000 a $274,165 b $ 34,165 c 2,318,876 12/31/12 240,000 278,265 38,265 2,357,141 12/31/13 240,000 282,859 * 42,859 2,400,000 Total $720,000 $835,289 $115,289 a $2,400,000 X 10% = $240,000. b $2,284,711 X 12% = $274,165. c $274,165 – $240,000 = $34,165. *Rounded $2...
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