(Solution) - On December 31 2014 Green Bank enters into a debt -(2025 Original AI-Free Solution)

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Academic Level: Undergrad. (yrs 3-4)

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On December 31, 2014, Green Bank enters into a debt restructuring agreement with Troubled Inc., which is now experiencing financial trouble. The bank agrees to restructure a $2-million, 12% note receivable issued at par by the following modifications:
1. Reducing the principal obligation from $2 million to $1.9 million
2. Extending the maturity date from December 31, 2014, to December 31, 2017
3. Reducing the interest rate from 12% to 10%
Troubled pays interest at the end of each year. On January 1, 2018, Troubled Inc. pays $1.9 million in cash to Green Bank. Troubled prepares financial statements in accordance with IFRS.
Instructions
(a) Discuss whether or not Troubled should record a gain.
(b) Calculate the rate of interest that Troubled should use to calculate its interest expense in future periods.
(c) Prepare the interest payment entry for Troubled on December 31, 2016.
(d) What entry should Troubled make on January 1, 2018?