In the latter part of 2010, Odessa Company experienced severefinancial pressure and was in default of meeting interest paymentson long-term notes of $6,000,000 due on December 31, 2015. Theunamortized premium on December 31, 2010 was $935,000. Theinterest rate on the debt was 11%, payable semiannually on June 30and December 31. In an agreement with Modern InvestmentCorporation on December 31, 2010, Odessa obtained acceptance of achange in principal and interest terms for the remaining 5-yearlife of the notes. The changes in terms are as follows:
(a) a reduction inprincipal of $475,000
(b) a reduction in theinterest rate to 3%
(c) Odessa agreed topay the $660,000 of interest in arrears
Instructions:
1. Compute the gain/loss on the restructuring of the debt.
2. Prepare thejournal entries for the restructuring of the debt, payment ofinterest under the old terms, and the first two interest payments that Odessa wouldmake under the new terms.