On January 1, 2020, Poorer Ltd owes Richer Corp a $220,000 note payable. The note bears interest
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On January 1, 2020, Poorer Ltd owes Richer Corp a $220,000 note payable. The note bears interest at 8%, payable annually, and the principal balance is due December 31, 2021. The market rate for comparable loans was and continues to be, 8%. Interest has been paid to December 31, 2019. Poorer is now in financial difficulty and may not be able to repay Richer. To promote payment, Richer agrees to restructure the note, reducing the interest to 7% payable annually, reducing the principal balance to $200,000, and extending the term to December 31, 2024. | ||||||
a) | Assume the restructuring is significant. Prepare all required journal entries on Poorer’s books for the note in 2020, including the December 31 interest payment. | |||||
b) | Assume the same restructuring as above except that the principal amount only dropped to $210,000. At this level, the restructuring of the note is not a significant change. Prepare all required journal entries on Poorer’s books for the note in 2020. |
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