ACCOUNTING FOR TROUBLED DEBT: MODIFICATION OF TERMS. Assume that Great Beef Co. owes Bank of America $5,000,000 on a 3-year, 9% note originally issued at par. After one year of making scheduled payments, the firm faces financial difficulty. At the end of the second year, Great Beef owes Bank of America 5,000,000 plus $450,000 of accrued but unpaid interest. (Assume that the financial diffi- culty has increased the riskiness of Great Beef Co. to the point where it would have to pay 15 percent to borrow money.)
a. Assume that Bank of America restructures the note by forgiving the $450,000 inter- est payable, reducing the note principal to $4,500,000, and reducing the interest rate to 6 percent. Show the financial statement effects at the date of restructuring using the template below assuming that Great Beef Co. uses
(1) U.S. GAAP.
(2) IFRS.
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Assets
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Liabilities
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Shareholders' Equity
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CC
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AOCI
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RE
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Journal entry:
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b. Assume that Bank of America restructures the note by forgiving the $450,000 interest payable, reducing the note principal to $4,800,000, and reducing the interest rate to 7 percent. Show the financial statement effects at the date of restructuring using the template below assuming that Great Beef Co. uses
(1) U.S. GAAP.
(2) IFRS.
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Assets
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Liabilities
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Shareholders' Equity
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CC
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AOCI
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RE
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Journal entry:
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c. Comment on the differences between the two systems. Which reporting system better represents the underlying economics of the debt restructuring? Will U.S. GAAP supplemental disclosures provide similar information? Explain.