Davis Inc. is in serious financial trouble and enters into an agreement with White Company, one of its creditors. Davis has a 8 percent note payable due to White Company for \(\$ 80.000\) plus \(\$ 6.400\) accrued interest. Under the terms of the agreement, White will receive computer equipment that cost \(\$ 50.000\) and has a book value of \(\$ 32.000\) and a fair value of \(\$ 37.000\). White agrees to forgive the accrued interest. reduce the note to \(\$ 40,000\), extend the maturity date two years, and reduce the interest rate to 6 percent. Interest is due at the end of each year.

\section*{Required}

a. Record the journal entries on the books of Davis Inc. for the modification of terms and the future interest payments. Prepare supporting schedules in good form.

b. Assume that instead of Davis giving the equipment to White. Davis issues to White 25,000 shares of its \(\$ 1\) par common stock, which has a market value of \(\$ 2\) per share. All other modifications remain the same.

1. Record the entry on the date of restructure on the books of Davis Inc.

2. Explain how the new interest rate and the interest expense each year will be determined.