On December 31, 2018, Penneez, Inc., approaches Dollarz Bank seeking new terms for its debt. On that date, Penneez owes Dollarz $220,000 on a 10-year, 10% note issued at par. In addition, it also owes the current year’s unpaid interest. Dollarz agrees to writeoff the outstanding interest; reduce the amount due on maturity by $20,000 and extend the due date of the debt to December 31, 2021. The coupon rate on the note due would remain at 10%. The current market rate is 12%. Both parties have adopted IFRS.

1. Determine if this transaction is a modification [minor restructure] or a settlement [major restructure]. State your reasons supported by a clearly organized set of computations.

2. Determine the amount at which the debt is to be carried in the books of Penneez under the new terms. Show clear computations to support your answer.

3. Prepare all necessary journal entries, on December 31, 2018, on the books of Penneez after the revised terms of this transaction take effect.

4. Similarly, prepare journal entries where necessary, on December 31, 2018, on the books of Dollarz after the revised terms of this transaction take effect. Since Dollarz had no prior information on the financial condition of Penneez, it had not provided for any loss on the loan.