Brown Company owed City Bank a $50,000, 10 percent (payable each December 31), four-year note dated January 1, 1995. Early in 1996, it became clear that Brown Company was experiencing difficulty in making the annual interest payment, although the company did manage to make the 1995 payment. Because of expected continuing difficulties, it appeared that there was a good chance the company would default on the note (as well as on other obligations). On January 2, 1997 the two parties agreed to restructure the debt by (a) reducing the remaining annual interest payments to $2,240 each and (b) reducing the principal amount (maturity amount) to $48,000. Brown paid the interest for 1996.
Required:
1. Compute the new yield or effective rate of interest to be used by Brown.
2. Give all entries required on date of restructure (January 2, 1997) for each company. If no entry is required, explain the reason.
3. Give all entries required at December 31, 1997, and 1998, for each company. Assume that City Bank uses the interest method