(Debtor/Creditor Entries for Continuation of Troubled Debt) Jeremy Hillary is the sole shareholder of Hillary Inc., which is currently under protection of the U.S. bankruptcy court. As a “debtor in possession,” he has negotiated the following revised loan agreement with Valley Bank. Hillary Inc.’s

$400,000, 12%, 10-year note was refinanced with a $400,000, 5%, 10-year note.

Instructions

(a) What is the accounting nature of this transaction?

(b) Prepare the journal entry to record this refinancing:

(1) On the books of Hillary Inc.
(2) On the books of Valley Bank.

(c) Discuss whether generally accepted accounting principles provide the proper information useful to managers and investors in this situation.