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EXERCISE 14-22

# 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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