Problem
Twelve years ago, Birch Ltd. (BL) borrowed $480,000 from Oak Trust Inc. (OTI). The 12- year, 10% note is due on today's date, December 31, 2020. The note was originally issued at par. BL is unable to settle the outstanding note so OTI has agreed extend the maturity date to December 31, 2022, reduce the principal to $455,000 and reduce the interest rate to 5% (the current market rate), payable annually on December 31. BL uses IFRS to prepare its financial statements.
Task
1. Using (i) factor tables, (ii) a financial calculator, or (iii) Excel function PV, determine if the arrangement BL and OTI have agreed to is considered a modification of terms or a settlement of troubled debt.
2. Prepare the journal entries necessary on BL's books at December 31, 2020, 2021, and 2022.
3. Explain how the answer to part (2) would change if OTI had agreed to extend the maturity date to December 31, 2022 and reduce the interest rate to 5%, but maintain the same principal amount of $480,000. Prepare the journal entry necessary on BL's books at December 31, 2020, 2021, and 2022.