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Unformatted text preview: Research IV Debt & Contingencies; Ch 11 LEARNING TEAM: Heather Hall, Maria Maldonado, Randi Padavano, Dee Carter, and Lisa Calhoun # Answrs # Correct % Tot Pts Tot Awd Q1 5 0% 3 Q2 3 0% 3 Q3 6 0% 3 Q4 3 0% 3 Q5 5 0% 3 15 Be concise but be complete. The word length is designed to accommodate a complete answer. Question 1 Case 11-2 Debt Restructuring 3 points Whiley Company issued a $100,000, five-year, 10 percent note to Security Company on January 2, 2005. Interest was to be paid annually each December 31. The stated rate of interest reflected the market rate of interest on similar notes. Whiley made the first interest payment on December 31, 2005, but due to financial difficulties was unable to pay any interest on December 31, 2006. Security agreed to the following terms: 1. The $100,000 principal would be payable in five equal installments, beginning December 31, 2007. 2. The accrued interest at December 31, 2006, would be forgiven. 3. Wiley would be required to make no other payments. Because of the risk associated with the note, it has no determinable fair value. The note is secured by equipment having a fair value of $80,000 at December 31, 2006. The present value of the five equal installments discounted at 10 percent is $75,815. a. Under GAAP: 1) 2 wt pt Which amount would Whiley report the restructured liability at December 31, 2006? Explain. (150 words) Reporting restructured liability is due to corporations having difficulty repaying their long-term debt obligations. When you restructure a liability the company is changing the terms of the note to reduce the financial burden on the debtor, Whiley in this case. With that in mind, Whileys restructured liability at December 31, 2006 would include the changes in the present value of the five equal installments, which were discounted, at $75,815. At December 31, 2006, the accrued interest would be forgiven, so that would still be a liability, but Security let that instance go. According to Schroeder, Clark, and Cathey, The amount of principal and interest to be repaid is less than the current carrying value of the liability; therefore, the debtor recognizes a gain (2011). It is necessary to determine the effective interest rate that equates the total future payments with the current carrying value (Schroeder, Clark, Cathey, 2011) 2) 1 wt pt How much gain would Whiley recognize in its income statement for 2006? Explain. (100 words) Whiley would recognize $24,815 on the income statement as a gain for 2006. In order to achieve this amount you would take the difference between the $100,000 originally recorded as a note payable and the restructured amount of $75,815. According to Schroeder, Clark and Cathey, a gain is recognized by the debtor when the current carrying value of the liability is less than the principal and the related interest that has to be repaid (2011). There is a forgiveness of debt on the report of $10,000 and the future cash flows are equal to the restructured debt, the effective...
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This note was uploaded on 12/15/2011 for the course ACC ACC taught by Professor Mari during the Fall '10 term at University of Phoenix.
- Fall '10