Troubled Debt Restructuring—Modification of Terms
In the latter part of 2007, Odessa Company experienced severe financial pressure and was in default of meeting interest payments on long term notes of $6,000,000 due on December 31, 2012. The interest rate on the debt was 11%, payable semiannually on June 30 and December 31. In an agreement with Modern Investment Corporation, Odessa obtained acceptance of a change in principal and interest terms for the remaining 5 year life of the notes. The changes in terms are as follows:
(a) A reduction of principal of $475,000.
(b) A reduction in the interest rate to 8%.
(c) Odessa agreed to pay on December 31, 2007, both the $660,000 of interest in arrears and the normal interest payment under the old terms.
Instructions:
1. Compute the total dollar difference in cash payments by Odessa over the 5 year period as a result of the restatement of terms.
2. Prepare the journal entries for the restructuring of the debt, payment of interest under the old terms, and the first two interest payments under the new terms that Odessa would make.