Question

Novak Corp. owes $269,000 to Splish Trust. The debt is a 10-year, 12% note due December 31, 2020. Because Novak Corp. is in financial trouble, Splish Trust agrees to extend the maturity date to December 31, 2022, reduce the principal to $215,000, and reduce the interest rate to 7%, payable annually on December 31.

(a) Prepare the journal entries on Novak’s books on December 31, 2020, 2021, 2022.

(b) Prepare the journal entries on Splish Trust’s books on December 31, 2020, 2021, 2022.

Answer 1

Answer:

Answer-(a):
Date	Account Title	Debit	Credit
Dec.31, 2020	Notes payable	$54,000
	Gain on reconstruction ($269,000 - 215,000)		$54,000
Dec.31, 2021	Interest expense ($215,000*7%)	$15,050
	Cash		$15,050
Dec.31, 2022	Interest expense ($215,000*7%)	$15,050
	5% Notes payable	$215,000
	Cash		$230,050
Answer-(b):
Date	Account Title	Debit	Credit
Dec.31, 2020	Loss on reconstruction ($269,000 - 215,000)	$54,000
	Notes receivable		$54,000
Dec.31, 2021	Cash	$15,050
	Interest revenue		$15,050
Dec.31, 2022	Cash	$230,050
	Notes receivable		$215,000
	Interest revenue		$15,050