Question

On December 31, 2017, ABC enters into a debt restructuring agreement with GG Bank. The bank...

On December 31, 2017, ABC enters into a debt restructuring agreement with GG Bank. The bank agrees to restructure a 6.75% (issued at par) $30,000,000 bond by making the following modifications:
1. reducing the principal obligation from $30,000,000 to $24,000,000.
2. extending the maturity date from December 31, 2017, to January 1, 2027.
3. reducing the interest rate from 6.75% to 6.00%. ABC’s market interest rate is currently 15% due to its risk profile, i.e. declining revenue and earnings.
Market Rateis 15%. Assume that on January 1, 2027, ABC repays the loan in full by paying $24,000,000 to DP Bank.

Interest Discount Carrying
Date Cash Paid Expense Amortized Amount
Dec. 31, 2017 $       13,693,379
Dec. 31, 2018 $         1,440,000 $       2,054,007 $       614,007 14,307,386
Dec. 31, 2019             1,440,000           2,146,108            706,108 15,013,494
Dec. 31, 2020             1,440,000           2,252,024            812,024 15,825,518
Dec. 31, 2021             1,440,000           2,373,828            933,828 16,759,345
Dec. 31, 2022             1,440,000           2,513,902        1,073,902 17,833,247
Dec. 31, 2023             1,440,000           2,674,987        1,234,987 19,068,234
Dec. 31, 2024             1,440,000           2,860,235        1,420,235 20,488,470
Dec. 31, 2025             1,440,000           3,073,270        1,633,270 22,121,740
Dec. 31, 2026             1,440,000           3,318,260        1,878,260 24,000,000
Jan. 01, 2017 $       12,960,000 $    23,266,621 $ 10,306,621

a) Prepare the interest payment entry for borrower on December 31, 2018.
b) What entry would borrower make on January 1, 2027?

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