Accounting for Nahor!

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PROBLEMS

1.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.

 

1.At December 31, 2010, Aaron Corporation owes $500,000 on a note payable due February 15, 2011.  It issues its audited financials on April 1of each year.  How much of the note payable should be considered a current liability under the following circumstances:

 

  • Aaron pays off the note on February 15, 2011 as planned, using company cash.

 

  • Aaron pays off the note on February 15, 2011 as planned, issuing company stock in exchange for the debt.

 

  • Aaron refinances the debt on February 15, 2011 and uses the proceeds from the new long-term debt to pay off the note.

 

  • Aaron tells the auditors that it plans to refinance the debt by February 15, 2011 and even though it has not contacted the bank yet to discuss the refinancing, it has generally been able to secure favorable financing

5.Cleveland Company purchased $80,000 of 9%, 5-year bonds of Greenwood Corporation for $74,086, which provide an 11% return.  It intends to hold these bonds to maturity.  The fair market value of the securities at year-end is $75,500.  Assuming that the bonds are considered held-to-maturity investments, prepare the journal entries for:

 

  • The purchase of the investment

 

  • The receipt of annual interest and discount amortization (assume effective interest method is used)

 

  • The fair market value adjustment at year-end (if necessary)

 

6.Cleveland Company purchased $80,000 of 9%, 5-year bonds of Greenwood Corporation for $74,086, which provide an 11% return.  The fair market value of the securities at year-end is $75,500.  Assuming that the bonds are considered available-for-sale investments, prepare the journal entries for:

 

  • The purchase of the investment

 

  • The receipt of annual interest and discount amortization

 

  • The fair market value adjustment at year-end (if necessary)

 

 

7.How would the answers to Problem #6 have differed if the securities had been trading securities?  (You don’t have to show the journal entries again – you can simply provide a brief statement about any differences).

 

 

8.Peyton Imports is contemplating an agreement to lease equipment to a customer for five years.  Peyton normally sells the asset for a cash price of $100,000.  Assuming that 8% is a reasonable rate of interest, what must the quarterly lease payments (beginning at the inception of the lease) be in order for Peyton to recover its normal selling price, as well as be compensated for financing the asset over the lease term?

    • Posted: 6 years ago
    • Due: 
    • Budget: $3
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