Problem NO: 13

Halvor Corporation is having financial difficulty and therefore has asked Frontenac National Bank to restructure its $5 million note outstanding. The

Halvor Corporation is having financial difficulty and therefore has asked Frontenac National Bank to restructure its $5 million note outstanding. The present note has 3 years remaining and pays a current rate of interest of 10%. The present market rate for a loan of this nature is 12%. The note was issued at its face value.

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Instructions

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Presented below and on the next page are four independent situations. Prepare the journal entry that

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Halvor and Frontenac National Bank would make for each of these restructurings.

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(a) Frontenac National Bank agrees to take an equity interest in Halvor by accepting common stock valued at $3,700,000 in exchange for relinquishing its claim on this note. The common stock has a par value of $1,700,000.

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(b) Frontenac National Bank agrees to accept land in exchange for relinquishing its claim on this note.

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The land has a book value of $3,250,000 and a fair value of $4,000,000.

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(c) Frontenac National Bank agrees to modify the terms of the note, indicating that Halvor does not have to pay any interest on the note over the 3-year period.

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(d) Frontenac National Bank agrees to reduce the principal balance due to $4,166,667 and require interest only in the second and third year at a rate of 10%.

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