Highland ltd is having financial difficulty and therefore has asked MalindiNational Bank to restructure its sh.3 million note outstanding. The present note has 3 years remaining and pays a current rate of interest of 10%. The present market rate for a loan of this nature is 12%. The note was issued at its face value.

Required

Prepare below are three independent situations. Prepare the journal entry that Highland ltd would make for each of these restructurings.

(a)MalindiNational Bank agrees to take an equity interest in Highland ltd by accepting ordinary shares valued at sh.2, 200,000 in exchange for relinquishing its claim on this note. The ordinary shares have a par value of sh.1, 000,000.10 marks

(b)MalindiNational Bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book value of sh.1, 950,000 and a fair value of sh.2, 400,000.10 marks

(c)MalindiNational Bank agrees to modify the terms of the note, indicating that Highland ltd does not have to pay interest on the note over the 3-year period.

5 marks