At December 31, 2010, Shutdown Manufacturing Limited had outstanding a $300,000, 12% note payable to Thornton National Bank. Dated January 1, 2008, the note was due on December 31, 2011, with interest payable each December 31. During 2011, Shutdown notified Thornton that it might be unable to meet the scheduled December 31, 2011 payment of principal and interest because of financial difficulties. On September 30, 2011, Thornton sold the note, including interest accrued since December 31, 2010, for $280,000 to Orsini Foundry, one of Shutdown’s oldest and largest customers. On December 31, 2011, Orsini agreed to accept inventory that cost $240,000 but was worth $315,000 from Shutdown in full settlement of the note.
Instructions
(a) Prepare the journal entry to record the September 30, 2011 transaction on the books of Thornton, Shutdown, and Orsini. For each company, indicate whether the transaction is a restructuring of troubled debt.
(b) Prepare the journal entries to record the December 31, 2011 transaction on the books of Shutdown and Orsini. For each company, indicate whether this transaction is a restructuring of troubled debt.