Modification of Terms
Lake Company, a major creditor of financially troubled Spain Company, has agreed to modify the terms of a debt owed to Lake Company. The debt consists of a $900,000, 12% note that is due currently along with accrued interest of $95,000. Lake Company agreed to extend the due date of the note and accrued interest for three years and to reduce the interest rate to 5% per annum (on both maturity value and accrued interest), with interest to be paid annually.
Required:
- Should a gain on restructuring be recognized by Spain Company? Explain.
- Prepare the entry that should be made on Spain Company”s books on the date of restructure.