Here is the problem I need help with.
Multiple Choice
PVC-0004
On December 31, 2008, Marsh Company entered into a debt restructuring agreement with Saxe Company, which was experiencing financial difficulties. Marsh restructured a $100,000 note receivable as follows:
• Reduced the principal obligation to $70,000.
• Forgave $12,000 of accrued interest.
• Extended the maturity date from December 31, 2008 to December 31, 2010.
• Reduced the interest rate from 12% to 8%. Interest was payable annually on December 31, 2009 and 2010.
Present value factors
Single sum, 2 years @ 8% .85734
Single sum, 2 years @ 12% .79719
Ordinary annuity 2 years @ 8% 1.78326
Ordinary annuity 2 years @ 12% 1.69005
Marsh does not elect the fair value option for recording this note receivable. In accordance with the agreement, Saxe made payments to Marsh on December 31, 2009 and 2010. How much interest income should Marsh report for the year ended December 31, 2010?
A $ 8,100
B $0
C $11,200
D $ 5,600
Here is the answer explanation:
A $ 8,100 This answer is correct. The requirement is to determine the amount of interest revenue to be recorded by Marsh, after a modification of terms type of troubled debt restructure on December 31, 2010. Under ASC Subtopic 310-40, when a modification of terms results in the present value of future cash flows being less than the carrying amount, then the interest revenue is calculated by using the effective interest method. In this problem the expected future cash flows is determined by discounting the principal and interest at the original effective rate of 12%.
70,000 x .79719 = 55,803
5,600 x 1.69005 = 9,464
Present value of future cash flows 65,267
The interest revenue to be recognized can then be determined using the effective interest method.
PV at 12/31/08 65,267
Interest income at 12/31/09 ($65,267 x 12%) 7,832
Interest receivable at 12/31/09 (70,000 x 8%) 5,600
Increase in carrying value of loan 2,232
PV at 12/31/09 67,499
Interest revenue at 12/31/10 (67,499 x 12%) $8,100
I think I get everything up to the point where the difference of interest increases the loan value... to the 67,499. I have been stuck on this topic for two days and I need to keep moving however, I want to make sure i get this.
any explanation and help/guidance through the answer would be most appreciated thank you guys so much!
Tiffany