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Prepare the journal entries on first trusts books on

1. (Debtor/Creditor Entries for Modification of Troubled Debt) Vargo Corp. owes $270,000 to First Trust. The debt is a 10-year, 12% notes due December 31, 2010. Because Vargo Corp. is in financial trouble, First Trust agrees to extend the maturity date to December 31, 2012, reduce the principal to $220,000, and reduce the interest rate to 5%, payable annually on December 31.

(a) Prepare the journal entries on Vargo's books on December 31, 2010, 2011, 2012.

(b) Prepare the journal entries on First Trust's books on December 31, 2010, 2011, 2012.

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