Question

Netflix co. is experiencing financial difficulty and has met with their creditor (TD) to explore their options related to a $2 million, 8% note payable that is outstanding. The note was issued on September 1, 2019 when the market rate of interest was 8%. There are two years remaining on the note and the current market rate of interest is 10%. Netflix and TD prepare financial statements in accordance with IFRS.

For each of the following independent situations prepare the journal entry that both Netflix and TD would on their books.

1. TD agrees to modify the terms so that Netflix is not paying any interest on the note for the remaining two years.

2. TD agrees to reduce the principal balance to $1,875,000 and requires interest only payments for the next two years at a rate of 9%.

3. Explain how your answer for b would be different if Netflix used ASPE.

Answer 1

Ans.1.

Notes Payable A/c Dr. To Interest Suspense A/c

$320,000

$320,000

Ans.2.

Notes Payable A/c Dr. To Capital Reserve A/c	$125,000	$125,000
Interest Suspense A/c Dr. To Notes Payable A/c	$40,000	$40,000

Ans.3. The answers won't be different if Netflix used ASPE.