Warren Companies purchased equipment for \($72,000\) from General Equipment Manufacturers on January 1, 2006. Warren paid \($12,000\) in cash and signed a five-year, 5% installment note for the remaining \($60,000\) of the purchase price. The note calls for annual payments of \($12,000\) plus interest on December 31 of each year. Warren made the first installment on time, but it was not able to make the next installment (due on December 31, 2007). On January 1, 2008 General Equipment agreed to restructure the note receivable.
Required:
Provide journal entries in the books of both Warren Companies and General Equipment Manufacturers for the period 2008-2010 under the following independent scenarios:
1. General Equipment accepted \($20,000\) in cash and old equipment fully depreciated in Warren's books (with a market value of \($14,000\) in exchange for the outstanding note.
2. General Equipment agreed to receive a total of \($57,600\) \($48,000\) plus \($9,600\), representing four years’ interest at 5%) on December 31, 2010 in exchange for the outstanding note.
(Interpolate for Warren's new effective interest rate.)
3. General Equipment decides to waive all interest and defers all principal payments until December 31, 2010.