On December 31, 2022, Sterling Bank enters into a debt restructuring agreement with Barkley plc, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, £3,000,000 note receivable by the following modifications:

1. Reducing the principal obligation from £3,000,000 to £2,400,000.

2. Extending the maturity date from December 31, 2022, to January 1, 2026.

3. Reducing the interest rate from 12% to 10%. Barkley’s market rate of interest is 15%. Barkley pays interest at the end of each year. On January 1, 2026, Barkley pays £2,400,000 in cash to Sterling Bank.

Instructions

a. Can Barkley record a gain under the term modification mentioned above? Explain.

b. Prepare the amortization schedule of the note for Barkley after the debt modification.

c. Prepare the interest payment entry for Barkley on December 31, 2024.

d. What entry should Barkley make on January 1, 2026?