This is a research case. You must complete this assignment INDIVIDUALLY. This means no help from other students. You may consult Dr. Eldridge while you are working on this case. See your course syllabus for further details on research case assignments and academic integrity. Read the Writing Guidelines included in this Word document before you begin writing your memo. Attach the "Cover Sheet and Grading Criteria for Research Case Assignments" to your memo after you have honestly signed the pledge at the top of the Cover Sheet. See further instructions under "Required" after the following case facts.
Case facts
On December 31, 2010, RCC, Inc. had a meeting with its primary lender, First Lincoln Bank (FLB), and the two parties agreed to modify the terms of the outstanding loan that RCC, Inc. currently owes to FLB. First Lincoln Bank had loaned RCC $30 million on January 1, 2008 for RCC . The loan requires RCC to pay $2.25 million to FLB each December 31, starting on 12/31/08 and continuing through 12/31/11, and it requires the original principal of $30 million to be repaid on 12/31/11. RCC made its required payments on this loan through 12/31/09 and has properly accrued interest expense for 2010. However, recent problems with the contractor providing the plant renovations have caused production delays, and these delays have had a negative impact on recent sales and cash flows. To help RCC through its current short-term cash flow shortage, FLB has agreed to the following modification of the terms of its loan to RCC.
The new loan payment schedule requires RCC to pay FLB seven annual installment payments of $5,373,160. These payments are due 12/31/11, 12/31/12, 12/31/13, 12/31/14, 12/31/15, 12/31/16, and 12/31/17. Thus, the loan maturity date is changed to December 31, 2017.
You are the controller for RCC, and Mr. Ronald Chance, RCC's Chief Executive Officer, has asked you to explain to him how this debt modification or restructuring will be recognized in RCC's 2010 financial statements. RCC prepares financial statements based on U.S. generally accepted accounting principles, and its fiscal year ends each December 31. RCC does not use the fair value option for financial instruments and does not intend to consider the fair valueoption for any of its financial instruments. You also know from your reading of the original and modified loan contracts that neither contract has conversion, call, or put options.
Required:
Part A
Complete the Part A Response Sheet attached to the end of this document.
Part B
Write a memo to Mr. Chance in response to his request. Explain the accounting treatment that is required for this modification or restructuring of debt, and properly cite the supporting authoritative literature. Remember that SCOPE is critical when identifying the proper authoritative literature. Your explanation should include the details of your analysis so that Mr. Chance understands your interpretation and application of the authoritative literature. Mr. Chance is interested in recognition but not disclosure, so you do not need to address any disclosure requirements in your memo to him. For clarity and completeness, include the following specifics in your explanation:
a) any adjusting journal entries that RCC needs to make on 12/31/10 related to this loan,
b) the carrying value of the debt on RCC's 12/31/10 balance sheet and any gains or losses RCC recognizes for this restructuring in its income statement for the year ended 12/31/10 (after all entries for 2010 have been recorded),and
c) the journal entry RCC would make for the $5,373,160 payment on 12/31/11 (next year), including an explanation of any interest expense or absence of interest expense recognized on this loan for the year ended 12/31/11.