Mazza Corp. owes Tsang Corp. a $110,000, 10-year, 10% note issued at par plus $11,000 of accrued interest. The note is due today, December 31, 2017. Because Mazza Corp. is in financial trouble, Tsang Corp. agrees to forgive the accrued interest and $10,000 of the principal, and to extend the maturity date to December 31, 2020. Interest at 10% of the revised principal will continue to be due on December 31 of each year. Assume the market rate of interest is 10% at the date of refinancing. Mazza and Tsang prepare financial statements in accordance with IFRS.
Instructions
(a) Using time value of money tables, a financial calculator, and computer spreadsheet functions, determine if this is a settlement or a modification. (Hint: Refer to Appendix 3B for tips on calculating.)
(b) Prepare a schedule of the debt reduction and interest expense for the years 2017 through 2020.
(c) Calculate the gain or loss for Tsang Corp. and prepare a schedule of the receivable reduction and interest income for the years 2017 through 2020.
(d) Prepare all the necessary journal entries on the books of Mazza Corp. for the years 2017, 2018, and 2019.
(e) Prepare all the necessary journal entries on the books of Tsang Corp. for the years 2017, 2018, and 2019. Assume that Tsang had not previously recognized any impairment?