Problem:
(Term Modification without Gain-Debtor's Entries) On December 31, 2007, the Firstar Bank enters into a debt restructuring agreement with Nicole Bradtke Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $2,000,000 note receivable by the following modifications:
1. Reducing the principal obligation from $2,000,000 to $1,600,000.
2. Extending the maturity date from December 31, 2007, to December 31, 2010.
3. Reducing the interest rate from 12% to 10%.
Bradtke pays interest at the end of each year. On January 1, 2011, Bradtke Company pays $1,600,000 in cash to Firstar Bank.
Instructions:
(a) Based on FASB Statement No. 114, will the gain recorded by Bradtke be equal to the loss recorded Firstar Bank under the debt restructuring?
(b) Can Bradtke Company record a gain under the term modification mentioned above? Explain.
(c) Assuming that the interest rate Bradtke should use to compute interest expense in future periods
is 1.4276%, prepare the interest payment schedule of the note for Bradtke Company after the debt restructuring.
(d) Prepare the interest payment entry for Bradtke Company on December 31, 2009.
(e) What entry should Bradtke make on January 1, 2011?