At January 1, 2018, Brainard Industries, Inc., owed Second BancCorp $12 million under a 10% note due December 31, 2020. Interest was paid last on December 31, 2016. Brainard was experiencing severe financial difficulties and asked Second BancCorp to modify the terms of the debt agreement. After negotiation Second BancCorp agreed to:

Answer and Explanation:

Brainard Industries, Inc Journal entries

Dr Book value:

($12 million + 1.2 million) $13,200,000

Cr Future payments:

[($1 million x 2) + $11 million ]13,000,000

Cr Gain to debtor$ 200,000

1. January1, 2018

Dr Interest payable(10%x$12,000,000)1,200,000

Cr Notes payable ($13 million – 12 million)*1,000,000

Cr Gain on troubled debt restructuring 200,000

Balance in note account will be equal to total cash payments under new agreement

2. December 31, 2019

Dr Notes payable1,000,000

Cr Cash (revised “interest” amount)1,000,000

Interest should not be recorded after restructuring. Therefore all subsequent cash payments will result in reductions of principal

3. December 31, 2020

Dr Notes payable1,000,000

Cr Cash (revised “interest” amount)1,000,000

Dr Notes payable11,000,000

Cr Cash (revised principal amount)11,000,000

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