Reference no: EM132721020

Jolly Food Services, Inc., [JFS] is a company which owns and runs several well established, high end restaurants. Initially it went through a very rapid expansion phase by buying out similar operations in surrounding planetary locations. Ten years ago, it bought out Krunchees-N-Kraakers, manufacturing popular snack food for $7,200,000. The acquisition had been paid for with borrowings from its bankers, First Kuzeen Trust Co., [FKT]. The Trust had issued a 10-year 12% note receivable at par to JFS for this amount. Although the acquisition had proved to be quite profitable overall, recently it fell on some hard times and created several significant cash flow crises for the company. Since the loan was coming due on December 31, 2019, JFS approached its creditor seeking concessions towards settling its debt.

JFS further owes FKT $864,000 in past accrued interest costs and has asked the Trust to forgive this debt element of accrued interest. The two parties finally agreed to the terms in a final settlement plan whereby, effective January 1, 2020, JFS was to pay a cash amount of $1,050,000 on that date, and accept a 6% 6-year note for $7,000,000 in exchange for the existing debt of the note payable and the outstanding interest. Interest on the revised note is payable annually on December 31. The market rate on January 1, 2020 was 8%. Both parties have adopted IFRS.

Problem 1: The determination of whether this re-financing is a major settlement or minor modification restructure will involve comparing a value of the renegotiated debt plus payments made with the amount of the obligation forgiven. These amounts, as calculated respectively, will be [Renegotiated Debt: $; Existing Obligation Forgiven: $].

Select one:

a. $5,782,075; and $8,064,000

b. $6,323,202; and $8,064,000

c. $8,050,000; and $7,200,000

d. $7,251,351; $8,064,000

e. None of the above