On Decemeber 31, 2003, the Merchant Bank enters into a devt restructuring agreem

Question

On Decemeber 31, 2003, the Merchant Bank enters into a devt restructuring agreement with Shrek Company, which is now experiencing financial trouble. The bank agrees to restructure a 10% issued at par, $1,000,000 note receivable by the following modifications:

1. Reducing the principal obligation to $800,000

2. Extending the maturity date to 12/31/05

3. Reducing the interest rate to 6%

Prepare all journal entries from 12-31-03 to 12-31-05 for both parties (debtor and creditor), and explain the interest rate assumed by the debtor and creditor after the restruccturing. Show all your work.

Explanation / Answer

1 Journal Entries Debtor Creditor 1 Creditor A/c Dr 800000 Notes Payable Dr 800000       To Notes Receivable 800000                To Debtor 800000 2 No Entry No Entry

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