In the latter part of 2010, New Iberia Company experienced severe financial pressure and was in default of meeting interest payments on long-term notes of $4,500,000 due on December 31, 2015. The interest rate on the debt was 10%, payable semiannually on June 30 and December 31. In an agreement with Loans-R-Us Corporation, New Iberia obtained acceptance of a change in principal and interest terms for the remaining 5-year life of the notes. The changes in terms are as follows:

(a) A reduction of principal of $500,000.

(b) A reduction in the interest rate to 7%.

(c) New Iberia agreed to pay on December 31, 2010, both the $450,000 of interest in arrears and the normal interest payment under the old terms.

Instructions:

1. Compute the total dollar difference in cash payments by New Iberia over the 5-year period as a result of the restatement of terms.

2. Prepare the journal entries for the restructuring of the debt, payment of interest under the old terms, and the first two interest payments under the new terms that New Iberia would make.