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On December 31, 2010, the American Bank enters

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*E14-21 (Term Modification without Gain—Debtor’s Entries) On December 31, 2010, the American
Bank enters into a debt restructuring agreement with Barkley Company, which is now experiencing
financial trouble. The bank agrees to restructure a 12%, issued at par, $3,000,000 note receivable by the
following modifications:

1. Reducing the principal obligation from $3,000,000 to $2,400,000.
2. Extending the maturity date from December 31, 2010, to January 1, 2014.
3. Reducing the interest rate from 12% to 10%.
Barkley pays interest at the end of each year. On January 1, 2014, Barkley Company pays $2,400,000 in cash to Firstar Bank.

Instructions
(a) Will the gain recorded by Barkley be equal to the loss recorded by American Bank under the debt
restructuring?

(b) Can Barkley Company record a gain under the term modification mentioned above? Explain.

(c) Assuming that the interest rate Barkley should use to compute interest expense in future periods
is 1.4276%, prepare the interest payment schedule of the note for Barkley Company after the debt
restructuring.

(d) Prepare the interest payment entry for Barkley Company on December 31, 2012.

(e) What entry should Barkley make on January 1, 2014?

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