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    Term Modification without Gain - Debtor's Entries

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    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.

    (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.

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    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.

    (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.

    $2.19