Pentastir Corp. cannot repay its debt to Madat Ltd. and the two companies have come to agreement moving forward. Pentastir has a Dec 31 year end. Today (December 31, 2020) is the old debts maturity date.

Old debt had an effective interest rate of 6%, a stated interest rate of 8% and a face value of $150,000. Interest was due semi-annually (June 30 and Dec 31)

New debt has an effective interest rate of 10%, a stated interest rate of 7% and a face value of $80,000. Interest will be due semi-annually (June 30 and Dec 31). The maturity date of new debt is December 2023.

Required:

(a) Determine whether the agreement represents a settlement of debt or a non-substantial modification of terms (show your work for marks). (4 marks)

(b) Show any accounting entries necessary for Pentastir Corp. on December 31, 2020. (3 marks)

(c) What amount will be shown December 31, 2021 (i.e. one year after issuance) on the Statement of Financial Position for the debt payable to Madat? (3 mark)