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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.

Instructions

(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

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