Daniel Perkins is the sole shareholder of Perkins Inc., which is currently under bankruptcy court protection. As a debtor in possession, he has negotiated a revised loan agreement with United Bank. Perkins Inc.'s $600,000, 10-year, 12% note issued at par was refinanced with a $600,000, 10-year, 5% note. Assume the market rate of interest is 12% at the refinancing date. Both Perkins and United Bank prepare financial statements in accordance with IFRS.
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 the financial statements provide the information that would be useful to managers and potential investors in this situation.