accounting acc 422

Project Description:

liberty one corporation owes royal dutch shell a 10-year, 10% note in the amount of $110,000 plus $11,000 of accrued interest. the note is due today, december 31, 2011. because liberty one corporation is in financial trouble, royal dutch shell agrees to forgive the accrued interest, $10,000 of the principal, and to extend the maturity date to december 31, 2014. interest at 10% of revised principal will continue to be due on 12/31 each year.

assume the following present value factors for 3 periods. the text has tables that you may you too. chapter six.

single sum ordinary annuity of 1

2¼% 2â…œ% 2½% 2⅝% 2¾% 3%

.93543 .93201 .92859 .92521 .92184 .91514

2.86989 2.86295 2.85602 2.84913 2.84226 2.82861


a. compute the new effective interest rate for liberty one corporation following restructure.

(hint: find the interest rate that establishes approximately $121,000 as the present value of the total future cash flows.) this will be hit or miss unless you know a very long formula.

b. prepare a schedule of debt reduction and interest expense for the years 2011 through 2014.

c. compute the gain or loss for royal dutch shell and prepare a schedule of receivable reduction and interest revenue for the years 2011 through 2014.

d. prepare all the necessary journal entries on the books of liberty one corporation for the years 2011, 2012, and 2013.
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