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    Term Modification with Gain-Debtor's Entries

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    Term Modification with 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 $1,300,000.
    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 $1,300,000 in cash to Firstar Bank for the principal.


    (a) How much gain can Bradtke Company record a under this term modification? $

    (b) Prepare the journal entries to record the gain on Bradtke's books.

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    Solution Summary

    The solution explains the journal entries relating to debt restructuring