Shahani Corporation is having financial difficulty and has therefore asked Bajwa National Bank to restructure its $3-million note outstanding. The present note has three years remaining and pays a current interest rate of 10%. The present market rate for a loan of this nature is 12%. The note was issued at its face value.
Instructions
For each of the following independent situations related to the above scenario, prepare the journal entry that Shahani and Bajwa National Bank would make for the restructuring that is described.
(a) Bajwa National Bank agrees to take an equity interest in Shahani by accepting common shares valued at $2.2 million in exchange for relinquishing its claim on this note.
(b) Bajwa National Bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a carry- ing amount of $1,050,000 and a fair value of $2.5 million.
(c) Bajwa National Bank agrees to modify the terms of the note so that Shahani does not have to pay any interest on the note over the three-year period.
(d) Bajwa National Bank agrees to reduce the principal balance down to $2.3 million and to require interest only in the second and third year at a rate of 9%.