On December 31, 2017, Green Bank enters into a debt restructuring agreement with Troubled Inc., which is now experiencing financial trouble. The bank agrees to restructure a $2-million, 12% note receivable issued at par by the following modifications:

1. Reducing the principal obligation from $2 million to $1.9 million

2. Extending the maturity date from December 31, 2017 to December 31, 2020

3. Reducing the interest rate from 12% to 10% Troubled pays interest at the end of each year.

On January 1, 2021, Troubled Inc. pays $1.9 million in cash to Green Bank. Troubled prepares financial statements in accordance with IFRS 9.

Instructions (a) Using time value of money tables, a financial calculator, and computer spreadsheet functions, discuss whether or not Troubled should record a gain.

(b) Using a finnancial calculator and computer spreadsheet functions, calculate the rate of interest that Troubled should use to calculate its interest expense in future periods.

(c) Prepare the interest payment entry for Troubled on December 31, 2019.

(d) What entry should Troubled make on January 1, 2021?

Use the same information as above, assume now that Green Bank reduced the principal to $1.6 million rather than $1.9 million. On January 1, 2021, Troubled Inc. pays $1.6 million in cash to Green Bank for the principal. The market rate is currently 10%.

Instructions (a) Using time value of money tables, a financial calculator, and computer spreadsheet functions, determine if Troubled can record a gain under this term modification. If yes, calculate the gain.

(b) Prepare the journal entries to record the gain on Troubled's books.

(c) What interest rate should Troubled use to calculate its interest expense in future periods?

(d) Prepare the amortization schedule of the note for Troubled after the debt restructuring.

(e) Prepare the interest payment entries for Troubled on December 31, 2018, 2019, and 2020.

(f) What entry should Troubled make on January 1, 2021?