On December 31, 2014, Zettlein Bank enters into a debt restructuring agreement with Larkin Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $10,000,000 note receivable by the following modifications:

1. Reducing the principal obligation from $10,000,000 to $8,000,000.

2. Extending the maturity date from December 31, 2014, to December 31, 2017.

3. Reducing the interest rate from 12% to 10%.

Larkin pays interest at the end of each year. On January 1, 2018, Larkin Company pays $8,000,000 in cash to Zettlein Bank.

Instructions

(a) Will the gain recorded by Larkin be equal to the loss recorded by Zettlein Bank under the debt restructuring?

(b) Can Larkin Company record a gain under the term modification mentioned above? Explain.

(c) Assuming that the interest rate Larkin should use to compute interest expense in future periods is 1.4276%, prepare the interest payment schedule of the note for Larkin Company after the debt restructuring.

(d) Prepare the interest payment entry for Larkin Company on December 31, 2016.

(e) What entry should Larkin make on January 1, 2018?