March Madness Corporation is having financial difficulty and therefore has asked
ID: 2450662 • Letter: M
Question
March Madness Corporation is having financial difficulty and therefore has asked ACC Bank to restructure its $3 million note outstanding. The present note has 3 years remaining and pays a current rate of interest of 10%. The present market rate for a loan of this nature is 12%. The note was issued at its face value. The note pays interest annually. REQUIRED: Presented below are three independent situations. Prepare the journal entry (if any) that March Madness Corporation would make for each of these restructurings on the first day of the restructuring only (you do not need to make any entries after the restructuring date): ACC agrees to take an equity interest in March Madness by accepting common stock valued at $2,500,000 in exchange for relinquishing its claim on this note. The common stock has a par value of $2,100,000. ACC agrees to modify the terms of the note, indicating that March Madness does not have to pay any interest on the note over the three year period. ACC agrees to reduce the principal balance due to $2,500,000 and March Madness does not have to pay any interest on the note over the three year period.
Explanation / Answer
In the books of March Madness (debtor)
JOURNAL ENTRY
Scenario 1- Restructuring (accepting common stock by ACC)
1. Notes payable a/c Dr $3,000,000
To Equity common stock a/c $2100000
*1 To Ordinary Gain a/c $ 4000000
*1 ($2.5m - $2.1m)
*2 To extraordinary gain (Restructuring gain) a/c $ 5000000
*2 ($3m - $2.5m)
(being common stock accepted by ACC for relinquishing its
claim of $3 million on the note and ordinnary & extraordinary gains credited respectively)
Scenario 2- No Journal entry (No interest to be paid over 3 years)
** It is only a fact, and no monetary exchange on the first day of the reconstructuring. So no journal entry is required for the qualitative statement. It goes with money measurement principle of book-keeping.
Scenario 3- Restructuring (ACC reduces principal balance)
2. Notes payable a/c Dr. $ 5,000,000
Extraordinary gain a/c $5,000,000
(being principal balance reduced to $2.5m and hence, this entry-net of tax)
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