On 31st December, 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 percent, issued at par, $3,000,000 note receivable by the subsequent modifications:
1. Reducing principal obligation from $3,000,000 to $2,400,000.
2. Extending maturity date from 31st December, 2010, to 1st January, 2014.
3. Reducing the interest rate from 12% to 10%.
Barkley pays interest at the end of each year. On 1st January, 2014, Barkley Company pays $2,400,000 in cash to Firstar Bank.
Instructions
(a) Will the increase recorded by Barkley be equal to the loss recorded by American Bank under the debt restructuring?
(b) Will Barkley Company record a gain under the term modification mentioned above? Clarify.
(c) Suppose that the interest rate Barkley should use to compute interest expense in future periods is 1.4276 percent, prepare the interest payment schedule of the note for Barkley Company after the debt restructuring.
(d) Prepare interest payment entry for Barkley Company on 31st December, 2012.
(e) What entry should Barkley make on 1st January, 2014?