Daniel Perkins is the sole shareholder of Perkins Inc., which is currently under bankruptcy court protection. As a debtor in possession, he has negotiated the following revised loan agreement with United Bank. Perkins Inc.’s $600,000, 10-year, 12% note was refinanced with a $600,000, 10-year, 5% note.
Instructions
(a) What is the accounting nature of this transaction?
(b) Prepare the journal entry to record this refinancing (1) on the books of Perkins Inc. and (2) on the books of United Bank.
(c) Discuss whether generally accepted accounting principles provide the information that would be useful to managers and potential investors in this situation.