Whiley Company issued a $ 100,000, five- year, 10 percent note to Security Company on January 2,
Question:
1. The $ 100,000 principal would be payable in five equal installments, beginning December 31, 2016
2. The accrued interest at December 31, 2015, would be forgiven.
3. Whiley would be required to make no other payments.
Because of the risk associated with the note, it has no determinable fair value. The note is secured by equipment having a fair value of $ 80,000 at December 31, 2015. The present value of the five equal installments discounted at 10 percent is $ 75,815.
Required:
a. Under current GAAP, at which amount would Whiley report the restruc-tured liability at December 31, 2015? Explain. How much gain would Whiley recognize in its income statement for 2015? Explain. How much interest expense would Whiley recognize in 2016? Explain.
b. Under current GAAP, what alternatives does Security have for reporting the restructured receivable? Explain. How would each alternative affect the 2015 income statement and future interest revenue? Explain.
c. Discuss the pros and cons of the alternatives in ( b) and compare them to the prior GAAP treatment ( treatment that was reciprocal to the debtor). d. If debtors were allowed to record the restructuring agreement in a manner similar to creditors, what would be the incremental effect (difference between what would be reported in this case and current GAAP for debtors) on Whiley’s financial statements, debt- to- equity ratio, and EPS for 2015 and 2016? Explain. GAAP
Generally Accepted Accounting Principles (GAAP) is the accounting standard adopted by the U.S. Securities and Exchange Commission (SEC). While the SEC previously stated that it intends to move from U.S. GAAP to the International Financial Reporting Standards (IFRS), the...
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Related Book For
Financial Accounting Theory and Analysis Text and Cases
ISBN: 978-1118582794
11th edition
Authors: Richard G. Schroeder, Myrtle W. Clark, Jack Cathey
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