Question
When a $4,500,000 loan that Ford Ltd. (an ASPE company) had from Noir Inc was due, Ford was in a tough financial situation and asked
When a $4,500,000 loan that Ford Ltd. (an ASPE company) had from Noir Inc was due, Ford was in a tough financial situation and asked for some modifications. The modifications were not considered significant and included a lower interest rate, an extension of 4 years, and a reduction of the amount to $4,000,000. Noir agreed to the modifications. How would Ford reflect these modifications in the accounting records?
a) Ford would leave the $4,500,000 note payable on the books, and would calculate a new effective interest rate, that with amortization, would bring the note to $4,000,000 over the next four years.
b) Ford would leave the $4,500,000 note payable on the books, and would use the new, lower interest rate to determine interest for the next four years.
c) Ford would write down the loan to $4,000,000, record a gain on restructuring of debt of $500,000, and use the new effective interest rate to calculate interest expense.
d) Ford would write down the loan to $4,000,000, record a gain on restructuring of debt of $500,000, and use the new, lower interest rate to calculate interest expense.
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