Problem - On December 31, 2010, the American Bank enters into a debt restructuring agreement with Barkley Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $3,000,000 note receivable by the following modifications:
Reducing the principal obligation from $3,000,000 to $1,900,000.
Extending the maturity date from December 31, 2010, to December 31, 2013.
Reducing the interest rate from 12% to 10%.
Barkley pays interest at the end of each year. On January 1, 2014, Barkley Company pays $1,900,000 in cash to American Bank for the principal.
(a) How much gain can Barkley Company record a under this term modification?
(b) Prepare the journal entries to record the gain on Barkley's books.
(c) What interest rate should Barkley use to compute its interest expense in future periods?
(d) Prepare the interest payment schedule of the note for Barkley Company after the debt restructuring. (If answer is zero, please enter 0, do not leave any fields blank.)
(e) Prepare the interest payment entries for Barkley Company on December 31, of 2011, 2012, and 2013.
(f) What entry should Barkley make on January 1, 2014?