Cardinal & Gold Real Estate Company (C&G) borrowed $100.0 million in an arms-length transaction on January 1, 2011. Interest is to be paid annually in arrears at 8% ($8.0 million) and the principal is to be paid in full on December 31, 2020. There were no debt issuance costs. On January 1, 2016, due to a lower interest rate environment, C&G meets with the lender to refinance the terms of the debt. The lender agrees to adjust the interest to 5.5% (paid annually in arrears). The maturity date remains the same. There were no debt modification costs. The fair market value of the debt instrument on January 1, 2016, is $93.0 million.

You are the chief accounting officer for C&G.

The loan refinancing described above was discussed in the weekly accounting and reporting issues meeting. In that meeting there were two views regarding the loan refinancing one view was that it should be considered a debt extinguishment and the other view was that it should be considered a modification of debt. You have the responsibility of conducting the research and writing a memo to summarize and conclude on the appropriate treatment for the refinancing.

Prepare the Companys analysis and conclude on the appropriate accounting for the adjustments to the terms of the debt arrangement. Your analysis should address both alternatives and conclude as to why one is the most appropriate. Be sure that your analysis links facts of the case to the codification guidance and state any judgments you make in determining the conclusion.

As an appendix to your analysis, include for each alternative the journal entries required as of the date of the refinancing as well as journal entries for each year end after the refinancing through and including December 31, 2020 (December 31 year end journal entries only; no need to consider monthly or quarterly entries). Please include a summary description for each journal entry. Also include a brief summary of the financial statement and economic impact for the two alternatives that could be provided to a non-accountant who asks What difference does it make whether this is treated as a modification or extinguishment?.