On December 31, 2010, the American Bank enters into a debt restructuring agreement with Barkley Company, which is now experiencing financial trouble. The Bank agrees to restructure a 12%, issued at par, $3,000,000 note receivable by the following modifications:
1. Reducing the principal obligation from $3,000,000 to $2,400,000.
2. Extending the maturity date from Dec. 31, 2010, to January 1, 2014.
3. Reducing the interest rate from 12% to 10%.
Barkely pays interest at the end of each year. On January 1, 2014, Barkkley Company pays $2,400,000 in cash to the Bank.
Instructions:
(a) Will the gain recorded by Barkley be equal to the loss recorded by American Bank under the debt restructuring?
(b) Can Barkley Company record a gain under the term modification mentioned above? Explain.
(c) Assuming that interest rate Barkely should use to compute interest expense in future periods is 1.4276%, prepare the interest payment schedule of the note for Barkley Company after debt restructuring.
(d) Prepare the interest payment entry for Barkely Company on Dec. 31, 2012.
(e) What entry should Barkley make on January 1, 2014?