On November 15, 2022, Muzeek Equipments, Inc., contacted Trumpetz International Bank, Inc., in order to discuss ways
Question:
On November 15, 2022, Muzeek Equipments, Inc., contacted Trumpetz International Bank, Inc., in order to discuss ways to renegotiate terms for the long term debt which it owed to the bank. The debt, coming due on January 1, 2023, was a 6% 5-year note issued at par for $3,200,000 plus the annual interest on the note for the year 2022. The interest was payable annually on January 1. The new terms agreed upon by both parties were as follows:
v the amended terms would become effective January 1, 2023;
v Muzeek would transfer a vacant industrial property with a book value of $360,000, accumulated depreciation of $146,000 and a fair market value of $192,000 in full settlement of the annual interest for 2022 which was due and unpaid as at December 31, 2022;
v the principal payable was reduced to $2,800,000 and would be due January 1, 2029; and v the annual interest coupon rate was to be reduced to 5% for the years, 2023 - 2028; and v the market rate was determined to be 9% on January 1, 2023. v interest was paid annually on December 31.
v assume Muzeek was preparing its financial statements under IFRS. REQUIRED:
a] Show how this debt (the note payable) with the new terms, is to be classified. Be sure to provide clear and sufficient computations to support your answer.
b] In the books of Muzeek, provide the appropriate journal entry/entries to record the transaction
(i) for the settlement of the debt for the interest. (ii) for recording the renegotiated note payable.
c] Under the renegotiated terms, would Trumpetz International Bank make a gain or suffer a loss on the negotiated debt? Provide the journal entries which the bank would prepare to record these two transactions in its books.
Financial management theory and practice
ISBN: 978-1439078099
13th edition
Authors: Eugene F. Brigham and Michael C. Ehrhardt