Thomas Company holds an overdue note receivable of \(\$ 600,000\) plus recorded accrued interest of \(\$ 36,000\). The effective interest rate is 6 percent. As the result of a court-imposed settlement on December 31, 20X6. Thomas agreed to the following restructuring arrangement:

The present value of the interest and principal payments to be received by Thomas Company discounted for two years at 6 percent is \(\$ 392,668\).
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a. Prepare journal entries on the creditor's books at December 31, 20X6, December 31, 20X7, and December 31, 20X8.

b. Prepare journal entries on the debtor's books at December 31, 20X6, December 31, 20X7, and December 31, 20 X8.

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Reduced the principal obligation to $400.000. Forgave the $36,000 accrued interest. Extended the maturity date to December 31, 20X8. Annual interest of $20,000 is to be paid to Thomas on December 31, 20X7, and 20X8.