I’m posting this comparison of my journal entry style with the one used in the
Kieso, Weygandt & Warfield 13th edition textbook. You are going to do Exercise
14-24 which is a slight variation. Please use “my style” even though the solution
manual in the accounting lab is in a different style!
*EXERCISE 14-22 (25–30 minutes)
(a)
The American Bank should use the historical interest rate of 12% to calculate the loss.
Using time-value of money tables, the loss is computed as follows:
(b)
Pre-restructuring carrying amount of note
Less: Present value of restructured future cash flows:
Present value of principal $2,400,000
due in 3 years at 12%
Present value of interest $240,000
paid annually for 3 years at 12%
Loss on debt restructuring
$3,000,000
$1,708,272a
576,439b
2,284,711
$ 715,289
Calculated with tables:
a
$2,400,000 X .71178 = $1,708,272.
b
$240,000 X 2.40183 = $576,439.
Using Excel or a financial calculator it is a one step problem with the following inputs:
n=3, i=12%, pmt=240,000, fv=2,400,000, “end” and solve for PV = 2,284,712.099
December 31, 2010 – TEXTBOOK STYLE
Bad Debt Expense ...........................................................................
715,289
Allowance for Doubtful Accounts .......................................
715,289
December 31, 2010 – T GORDON STYLE
Allowance for doubtful accounts ...................................
715,288
Note Receivable (restructured)
2,284,712
Note Receivable (old) .............................................
3,000,000
(c)
The interest receipt schedule is prepared as follows:
Note that this is the same amortization tables for either style of journal entry!
AMERICAN BANK
Interest Receipt Schedule After Debt Restructuring
Effective-Interest Rate 12%
Cash
Interest
Increase
Received
Revenue (12%)
in Carrying
(10%)
Amount
Date
12/31/10
12/31/11
$240,000a
12/31/12
240,000
12/31/13
240,000
Total
$720,000
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
$274,165b
278,265
282,859*
$835,289
$ 34,165c
38,265
42,859
$115,289
Carrying Amount
of Note
$2,284,711
2,318,876
2,357,141
2,400,000
TEXTBOOK STYLE ENTRIES:
(d) Interest receipt entry for American Bank is:
December 31, 2012
Cash ..................................................................................................
240,000
Allowance for Doubtful Accounts ..................................................
38,265
Interest Revenue ...................................................................
(e)
278,265
The receipt entry at maturity is:
January 1, 2014
Cash ..................................................................................................
2,400,000
Allowance for Doubtful Accounts ..................................................
600,000
Note Receivable ....................................................................
3,000,000
*EXERCISE 14-22 (Continued)
T GORDON STYLE ENTRIES:
(d)
(e)
Interest receipt entry for American Bank is:
December 31, 2012
Cash..................................................................................
240,000
Note Receivable (restructured) .......................................
38,265
Interest Revenue.....................................................
The receipt entry at maturity is:
January 1, 2014
Cash..................................................................................
240,000
Interest revenue ...............................................................
Note Receivable (restructured)..............................
42,859
Cash
2,400,000
Note Receivable (restructured)
COMPARISON BALANCE SHEETS
Immediately after restructuring
TEXTBOOK STYLE
T GORDON STYLE
Note Receivable
Note Receivable
$2,284,711
Less allowance
The adjustment to the allowance account
would result in an entry to bad debt
expense based.
Net Receivable
278,265
282,859
2,400,000
3,000,000
715,289
$2,284,711
One year after restructuring
T GORDON STYLE
Note Receivable
$2,318,876
Any allowance account would be adjusted as
part of another process to see what amounts
are deemed uncollectible with respect to the
OTHER notes receivable
TEXTBOOK STYLE
Note Receivable
Less allowance
Net Receivable
3,000,000
681,124
$2,318,876
This is only the specific part of the allowance
account related to this particular note – there would
be other adjustments to the allowance for other
estimated bad debts
Allowance balance would be reduced by $ 34,165c so $715,289 – 34,165 = 681,124
Two years after restructuring
T GORDON STYLE
Note Receivable
$2,357,141
Any allowance account would be adjusted as
part of another process to see what amounts
are deemed uncollectible with respect to the
OTHER notes receivable
TEXTBOOK STYLE
Note Receivable
Less allowance
Net Receivable
3,000,000
642,859*
$2,357,141
This is only the specific part of the allowance
account related to this particular note – there would
be other adjustments to the allowance for other
estimated bad debts
*Allowance balance would be reduced by $38,265 so $681,124 – 38,265 = 642,859
Conclusion – the entries get have exactly the same impact on the balance sheet and the income statement. The
difference is that we are in essence setting up a “Discount on Notes Receivable” account for each separate loan. In
other words, there would be a separate allowance account for each restructured loan that would have to be treated as
a “pair of accounts” just like we do for bonds payable with a premium or discount.
In practice, it is more common to have a “general allowance” account related to the receivables as a whole - it is
tested for accuracy at each balance sheet date. With the textbook method, you would still have to do this testing but
it would be more work if you couldn’t analyze GROUPS of receivables using tools such as an aging of receivables
analysis!