PROBLEM 9-9: MODIFIED TERMS
GIVEN:
OLD TERMS:
Principal 8,000,000
Accrued Interest 640,000
OLD Effective rate 8%
NEW TERMS
PV of 1 @ 8% for 2 periods 0.8573 Maturity date : December 31, 2021
PV of an ordinary annuity 1.7833 Interests are to be paid : December 31, 2020 and 2021
New Principal obligation 7,000,000
New interest rate 10%
The accrued interest was forgiven
Present value of New Liablity Present value of New Liablity
Principal (7M x .8573) 6,001,100 Principal (7M x .8573) 6,001,100
Interest (7M x 10%) x 1.7833 1,248,310 7,249,410 Interest (7M x 10%) x 1.7833 1,248,310 7,249,410
Less:Face value of NEW Liab 7,000,000 Less:Carrying value of OLD Liab 8,640,000
Premium on notes payable 249,410 Gain on extinguishment 1,390,590
ENTRY: INTEREST PAID
UPON RECOGNITION: DATE PAID (10%) EXPENSE (8%) AMOR PV
Notes payable -OLD 8,000,000 1/1/2020 7,249,410
Accrued interest payable 640,000 12/31/2020 700,000 579,952.80 120,047.20 7,129,363
Notes payable - New 7,000,000 12/31/2021 700,000 570,349.02 129,650.98 7,000,000
Premium on notes payable 249,410 249,698.18
Gain on extinguishment 1,390,590
ENTRY:
INTEREST PAID: 12/31/20
Interest expense 700,000
Cash 700,000
(7M x 10%)
ENTRY: 12/31/20
AMORTIZATION OF PREMIUM
Premium on notes payable 120,047
Interest expense 120,047
ENTRY: 12/31/21
SETTLEMENT OF DEBT
Notes payable 7,000,000
Cash 7,000,000
ENTRY: 12/31/21
INTEREST PAID
Interest expense 700,000
Cash 700,000
(7M x 10%)
ENTRY: 12/31/21
AMORTIZATION OF PREMIUM
Premium on notes payable 129,651
Interest expense 129,651
