Accounting for Troubled Debt Restructurings:
On December 31, 2004, Kathleen Lowell Bank enters into a debt restructuring agreement with Dennis Company which is experiencing financial difficulties. The bank restructures a $4,000,000 note receivable by:
1. Reducing the principal obligation from $4,000,000 to $3,200,000.
2. Extending the maturity date from 12/31/04 to 12/31/07, and
3. Reducing the interest rate from 12% to 6%.
Interest has been paid up to date as of 12/31/04.
Instructions:
Discuss the nature of this transaction, indicating whether any gain or loss is recognized by either party and preparing any 12/31/04 journal entries that may be required by the debtor (Dennis).