At December 31, 2015, Marshall Corporation was indebted to Community Bank under

Question

At December 31, 2015, Marshall Corporation was indebted to Community Bank under a $3,000,000, 8% unsecured note. The note was issued at face value on December 31, 2012, and had a maturity date of December 31, 2017. Interest on the note was due annually on December 31, and had last been paid on December 31, 2013. Marshall was having severe financial difficulties, and started negotiating a restructuring of the terms of the debt agreement with the Bank in the fourth quarter of 2015.

The Bank would (a) forgive the accrued interest from 2014 only; (b) reduce the annual interest rate to 6% on the revised principal balance, which would include the accruecd interest from 2015 that was not forgiven; and (c) extend the maturity date to December 31, 2018. Interest payments on the revised principal balance would be due on December 31, 2016, December 31, 2017, and December 31, 2018.

So I have figured out that the undiscounted future payment is less than the carrying value of the note. However, since only the interest from 2014 will be forgiven, what should I record on the journal entry on 12/31/15 to adjust the notes payable balance?

Explanation / Answer

Interest Accrued 48000 Note Payable-6% 324000 Gain on debt settlement 24000 300000 8% 24000 2014 300000 8% 24000 2015

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