On December 31, 20X8 when the then existing market rate is 7%, the SecondStar Bank enters into a debt restructuring agreement with Paris Ritchie Company, which is now experiencing financial trouble. Ritchie has been able to make all related interest payments, but was not able to pay off the principal. The bank agrees to restructure the initial 8%, issued at par, $500,000 note receivable by the following modifications:

reducing the principal obligation from $500,000 to $400,000.

extending the maturity date from December 31, 20X8, to December 31, 20Y2 (4 yrs).

reducing the interest rate from 8% to 7% for subsequent years. (Payments to be made annually)

Required: 1. Will Ritchie record a gain under the term modification? Explain and show calculations.

2. What interest rate should SecondStar use to calculate the gain or loss on the debt restructuring

3. Compute the gain or loss that SecondStar will show under GAAP, indicating whether it is a gain or loss

4. Assume the same information as above, except that the principle is reduced to $300,000. What gain or loss (if any) will Ritchie?