A) On December 31, 20x0, the American Bank enters into a debt restructuring agreement with Barkley Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $3,000,000 note receivable by the following modifications:

1. Reducing the principal obligation from $3,000,000 to $2,400,000.
2. Extending the maturity date from December 31, 20x0, to January 1, 20x4.
3. Reducing the interest rate from 12% to 10%.

Barkley pays interest at the end of each year. On January 1, 20x4, Barkley Company pays $2,400,000 in cash to Firstar Bank.

Instructions

1. Will the gain recorded by Barkley be equal to the loss recorded by American Bank under the debt restructuring?
2. Can Barkley Company record a gain under the term modification mentioned above? Explain.
3. Assuming that the interest rate Barkley should use to compute interest expense in future periods is 1.4276%, prepare the interest payment schedule of the note for Barkley Company after the debt restructuring.
4. Prepare the interest payment entry for Barkley Company on December 31, 20x2.
5. What entry should Barkley make on January 1, 20x4?
6. Use Excels Goal Seek function to show how the rate of 1.4276% in part (c) was calculated.

B) Using the same information as in A) , answer the following questions related to American Bank (creditor).

Instructions

1. What interest rate should American Bank use to calculate the loss on the debt restructuring?
2. Compute the loss that American Bank will suffer from the debt restructuring. Prepare the journal entry to record the loss.
3. Prepare the interest receipt schedule for American Bank after the debt restructuring.
4. Prepare the interest receipt entry for American Bank on December 31, 20x2.
5. What entry should American Bank make on January 1, 20x4?

C) Use the same information as in A) above except that American Bank reduced the principal to $1,900,000 rather than $2,400,000. On January 1, 20x4, Barkley pays $1,900,000 in cash to American Bank for the principal.

Instructions

1. Can Barkley Company record a gain under this term modification? If yes, compute the gain for Barkley Company.
2. Prepare the journal entry to record the gain on Barkleys books
3. What interest rate should Barkley use to compute its interest expense in future periods?
4. Prepare the interest payment schedule of the note for Barkley Company after the debt restructuring.
5. Prepare the interest payment entries for Barkley Company on December 31, of 20x1, 20x2, and 20x3.
6. What entry should Barkley make on January 1, 20x4?

D) Using the same information as in A) and C) above, answer the following questions related to American Bank (creditor).

Instructions

1. Compute the loss American Bank will suffer under this new term modification. Prepare the journal entry to record the loss on Americans books.
2. Prepare the interest receipt schedule for American Bank after the debt restructuring.
3. Prepare the interest receipt entry for American Bank on December 31, 20x1, 20x2, and 20x3.
4. What entry should American Bank make on January 1, 20x4?