Accounting for Troubled Debt: Modification of Terms. Assume that Great Beef Co. owes Bank of America $5,000, 000 on a 3-year, 9% note originally issued at par. After one year of making scheduled payments, the firm faces financial difficulty. At the end of the second year, Great Beef owes Bank of America $5,000,000 plus $450,000 of accrued but unpaid interest. (Assume that the financial difficulty has increased the riskiness of Great Beef Co. to the point where it would have to pay 15% to borrow money.)
a. Assume that Bank of America restructures the note by forgiving the $450,000 interest payable, reducing the note principal to $4,500,000, and reducing the interest rate to 6%. Show the financial statement effects at the date of restructuring using the template below assuming that Great Beef Co. uses:
(1) U.S. GAAP
b. Assume that Bank of America restructures the note by forgiving the $450,000 interest payable, reducing the note principal to $4,800,000, and reducing the interest rate to 7%. Show the financial statement effects at the date of restructuring using the template below assuming that Great Beef Co. uses:
(1) U.S. GAAP
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