Answer:
a. Forgive the interest accrued for the year just ended (2020)
January 1, 2021, unpaid interest is forgiven by bank
Dr Interest payable 1,200,000
Cr Gain on troubled debt restructuring 1,200,000
b. Reduce the remaining two years’ interest payments to $1 million each and delay the first payment until December 31, 2022.
Even though the interest payments decrease from $11,000,000 x 10% = $1,100,000 to $1,000,000 (which results in $100,000 savings per year), no journal entry is necessary to record these savings.
But we must record accrued interests and their payment:
December 31, 2021, accrued interests on restructured bank loan
Dr Interest expense 1,000,000
Cr Interest payable 1,000,000
December 31, 2022, interests paid to the bank
Dr Interest payable 1,000,000
Dr Interest expense 1,000,000
Cr Cash 2,000,000
December 31, 2023, note payable plus interests repaid to the bank
Dr Notes payable 11,000,000
Dr Interest expense 1,100,000
Cr Cash 12,100,000
Since the interest charged by the bank was reduced to $1 million for two years, it covered interest expense from 2021 and 2022, therefore, the interest charged during 2023 should be the normal interest rate = $11,000,000 x 10% = $1,100,000
c. Reduce the unpaid principal amount to $11 million.
January 1, 2021, unpaid principal amount reduced by $1 million
Dr Notes payable 1,000,000
Cr Gain on troubled debt restructuring 1,000,000
