Question

Clearwater Incorporation signed a 6 year, $8,000,000 10% unsecured note with Federal National Bank. The note was signed on January 1, 2017 and will mature on December 31, 2022. Annual interest payments related to this note was paid on December 31, 2017, but during the course of 2018 Clearwater Incorp, has experienced a number of operational/financial issues and at the end of 2018 was unable to make the interest payment that was due on 1/1/2018 the executive team from Clearwater Yachts sat down with the president of Federal National Bank and negotiated a restructuring of the terms of the accrued interest related to 2018, reduce all future payments by 50% and accept $7,000,000 as the final principle amount provide journal entries for Clearwater on 1/1/2019 as a result of restructuring. Are there no journal entries, and if so explain why?

Answer 1

As on 1/1/2019

Journal entry for interest restructured

There will be no journal for the reduction in future repayments by 50%.

Journal entry for reduction principal amount

(Debit) 10% Notes payable (Federal national bank) - $1,000,000

   (Credit) Extraordinary gain - $1,000,000

(Being reduction in principal amount as per restructuring transferred to Extra ordinary gain)