On December 31, 2009, Short Co. is in financial difficulty and cannot pay a $500,000, 5% note and the related accrued interest of $25,000 due to Bryan Bank that day. Bryan agrees to forgive the accrued interest, reduce the principal to $450,000, extend the maturity date to December 31, 2011, and reduce the interest rate to 4%. The present value of the restructured cash flows discounted at 5% is $441,633. Interest is paid annually on December 31.
(a) Prepare the journal entry on Short’s books to record the debt restructuring.
(b) Prepare the journal entry on Bryan Bank’s books to record the debt restructuring.
(c) Prepare the journal entry on Short’s books to record the interest payment on December 31, 2010.