1.

On December 31, Year Three, the Ideal Corporation owes a local bank $900,000 on a 6
percent note along with one year of accrued interest. The note itself comes due in exactly
five more years. Because Ideal is undergoing financial difficulties, the two parties restructure
the note. The accrued interest is eliminated and the principal of the note is reduced to
$600,000 which is now due in 10 years. The annual interest rate drops from 6 percent to 4
percent ($24,000 per year) although the current interest rate on such risky loans is now 12
percent. The present value of these new future cash flows at a 4 percent annual rate is
assumed to be $600,000 while at a 6 percent annual rate is assumed to be $480,000 and at
12 percent it is $260,000. What loss should the bank recognize on this troubled debt
restructuring?
A -0B $354,000
C $474,000
D $694,000
2. On December 31, Year Three, the Eveland Corporation owes a local bank $900,000 on a 6
percent note along with one year of accrued interest. The note itself comes due in exactly
five more years. Because Eveland is undergoing financial difficulties, the two parties
restructure the note. The accrued interest is eliminated and the principal of the note is
reduced to $600,000 which is now due in 10 years. The annual interest rate drops from 6
percent to 4 percent ($24,000 per year) although the current interest rate on such risky
loans is now 12 percent. The present value of these new future cash flows at a 4 percent
annual rate is assumed to be $600,000 while at a 6 percent annual rate is assumed to be
$480,000 and at 12 percent it is $260,000. What amount of interest revenue should the
bank recognize at the end of Year Four?
A -0B $19,200
C $24,000
D $28,800
3. On December 31, Year Three, the Cleveland Corporation owes a local bank $900,000 on a 6
percent note along with one year of accrued interest. The note itself comes due in exactly
five more years. Because Cleveland is undergoing financial difficulties, the two parties
restructure the note. The accrued interest is eliminated and the principal of the note is
reduced to $600,000 which is now due in 10 years. The annual interest rate drops from 6
percent to 4 percent ($24,000 per year) although the current interest rate on such risky
loans is now 12 percent. The present value of these new future cash flows at a 4 percent
annual rate is assumed to be $600,000 while at a 6 percent annual rate is assumed to be
$480,000 and at 12 percent it is $260,000. What gain should Cleveland recognize on this
troubled debt restructuring?
A -0B $114,000
C $354,000
D $474,000
4. On April 23, Year Four, Harding Corporation owes the local bank $600,000 on an 8 percent
note plus $90,000 in accrued interest. The note itself comes due in exactly six more years.
Because Harding is undergoing severe financial difficulties, the two parties restructure the

note. The accrued interest is eliminated and the principal of the note is reduced to $500,000
which is now due in exactly 10 years. The annual interest rate drops from 8 percent to 5
percent although the current interest rate on such questionable loans is 15 percent. Assume
that the present value of these future cash flows at 5 percent interest is $500,000 and at 8
percent is $390,000 and at 15 percent is $220,000. What gain should Harding recognize on
this troubled debt restructuring?
A -0B $190,000
C $300,000
D $470,000
5. The Petersen Corporation borrows $1.6 million from the First Bank of Union. The money is
borrowed on January 1, Year One. Petersen agrees to pay interest each December 31 at an
annual rate of 12 percent. The loan principal comes due in exactly ten years. Interest
payments are paid in a timely fashion for the first two years but the payment due on
December 31, Year Three is not made. The next day, Petersen and the bank agree to a
restructuring of the remaining debt. The principal is reduced by $600,000 to $1 million and
the cash interest rate falls from 12 percent to 7 percent. The first annual interest payment of
$70,000 will be on December 31, Year Four. The final change made on the restructuring is
that the principal is now due in 12 years. No other payments will be made. The present
value of the cash flows at 7 percent is $1 million. The present value of the cash flows at 12
percent is $700,000. What gain should Petersen recognize on the restructuring?
A None
B $600,000
C $900,000
D $1,092,000
6. The Patel Corporation borrows $1.6 million from the State Bank of Jonesville. The money is
borrowed on January 1, Year One. Patel agrees to pay interest each December 31 at an
annual rate of 12 percent. The loan principal comes due in exactly ten years. Interest
payments are paid in a timely fashion for the first two years but the payment due on
December 31, Year Three is not made. The next day, Patel and the bank agree to a
restructuring of the remaining debt. The principal is reduced by $600,000 to $1 million and
the cash interest rate falls from 12 percent to 7 percent. The first annual interest payment of
$70,000 will be on December 31, Year Four. The final change made on the restructuring is
that the principal is now due in 12 years. No other payments will be made. The present
value of the cash flows at 7 percent is $1 million. The present value of the cash flows at 12
percent is $700,000. What loss should the State Bank of Jonesville recognize on this
restructuring agreement?
A None
B $600,000
C $900,000
D $1,092,000
7. The Acme Company borrows $1 million from the First National Bank on January 1, Year One
with annual interest of 8 percent. The loan is to be repaid in five years. On January 1, Year
Three, when Acme now owes a total of $1,120,000, the parties meet to restructure the
agreement. On that date, the prime interest rate is 10 percent but the interest rate for

questionable loans is 16 percent. Acme puts forth a plan which says that the principal will be
reduced to $600,000 due in exactly five years and that annual interest of 10 percent will be
paid every December 31 during that time. For this computation assume that the present
value of $1 in five years at 8 percent annual interest is .66, at 10 percent is .60, and at 16
percent is .45. Assume that the present value of an ordinary annuity of $1 for five years at 8
percent annual interest is 3.93, at 10 percent is 3.72, and at 16 percent is 3.25. Assume that
the present value of annuity due of $1 for five years at 8 percent annual interest is 4.27, at
10 percent is 4.10, and at 16 percent is 3.80. If both parties agree to the proposed
restructuring, what loss is recorded by the bank and what interest revenue does the bank
recognize for Year Three?
A No loss and no interest revenue
B No loss and $60,000 interest revenue
C $473,800 loss and $51,696 interest revenue
D $488,200 loss and $50,544 interest revenue
8. Arton Company borrows $1 million from the Second National Bank on January 1, Year One
with annual interest of 8 percent. The loan is to be repaid in five years. On January 1, Year
Three, when Arton now owes a total of $1,120,000, the parties meet to restructure the
agreement. On that date, the prime interest rate is 10 percent but the interest rate for
questionable loans is 16 percent. Arton puts forth a restructuring plan which says that the
principal will be reduced to $600,000 due in exactly five years and that annual interest of 10
percent will be paid every December 31 during that time. For this computation assume that
the present value of $1 in five years at 8 percent annual interest is .66, at 10 percent is .60,
and at 16 percent is .45. Assume that the present value of an ordinary annuity of $1 for five
years at 8 percent annual interest is 3.93, at 10 percent is 3.72, and at 16 percent is 3.25.
Assume that the present value of annuity due of $1 for five years at 8 percent annual
interest is 4.27, at 10 percent is 4.10, and at 16 percent is 3.80. If the plan is accepted, what
gain is recorded by Arton and what interest expense is recognized for Year Three?
A No gain and $60,000 interest expense
B No gain and $72,000 interest expense
C $220,000 gain and no interest expense
D $432,800 gain and no interest expense
9. The Ashland Company borrows $1 million from the Third National Bank on January 1, Year
One with annual interest of 8 percent. The loan is to be repaid in five years. On January 1,
Year Three, when Ashland now owes a total of $1,120,000, the parties meet to restructure
the agreement. On that date, the prime interest rate is 10 percent but the interest rate for
questionable loans is 16 percent. Ashland puts forth a repayment plan which says that they
would pay a set annual payment of $250,000 for five years with the first payment made
immediately. No interest would be added. For this computation assume that the present
value of $1 in five years at 8 percent annual interest is .66, at 10 percent is .60, and at 16
percent is .45. Assume that the present value of an ordinary annuity of $1 for five years at 8
percent annual interest is 3.93, at 10 percent is 3.72, and at 16 percent is 3.25. Assume that
the present value of annuity due of $1 for five years at 8 percent annual interest is 4.27, at
10 percent is 4.10, and at 16 percent is 3.80. If this plan is accepted, what loss must the
bank recognize and what interest revenue does the bank recognize for Year Three?
A No loss and no interest revenue
B No loss and $85,400 interest revenue

C $52,500 loss and $65,400 interest revenue

D $137,500 loss and $78,600 interest revenue
10. On April 26, Year Four, Harding Corporation owes the local bank $700,000 on an 8 percent
note plus $120,000 in accrued interest. The note itself comes due in exactly six more years.
Because Harding is undergoing severe financial difficulties, the two parties restructure the
note on that date. The accrued interest is eliminated and the principal of the note is reduced
to $400,000 which is now due in exactly 10 years. The annual interest rate drops from 8
percent to 5 percent although the current interest rate on such questionable loans is 15
percent. Assume that the present value of these future cash flows at 5 percent interest is
$400,000 and at 8 percent is $270,000 and at 15 percent is $160,000. What gain should
Harding recognize on this troubled debt restructuring?

A -0B $220,000
C $420,000
D $550,000
11. Samattin Corporation borrows $800,000 on January 1, Year One from a bank on a five-year
note that is supposed to pay cash interest of 10 percent per year. Samattin fails to make
the first interest payment on December 31, Year One. On the next day, the bank
restructures the loan with Samattin so that the company does not go bankrupt. The first
year interest is forgiven and the face value of the note is reduced to $500,000. The interest
rate is dropped from 10 percent to 6 percent. Instead of being due in four more years, the
face value is now due in 9 years. The present value of these future cash flows at a 10
percent effective rate is $380,000. What gain does Samattin recognize on the restructuring
of this loan?
A Zero
B $110,000 gain
C $300,000 gain
D $500,000 gain