Reference no: EM132580030

On December 15, 2017, Skeez Equipments, Inc., contacted Drumz International Bank, Inc., in order to discuss ways to renegotiate terms for the long term debt which it owed to the bank. The debt, coming due on January 1, 2018, was a 8% 5-year note issued at par for $2,000,000 plus the annual interest on the note for 2017. The interest was payable annually on January 1.

The new terms agreed upon by both parties were as follows:

1. the amended terms would become effective January 1, 2018;
2. Skeez would transfer a plot of vacant land with a book value of $90,000 and a fair market value of $160,000 in full settlement of the the annual interest for 2017 which was due and unpaid as at December 31, 2017;
3. the principal payable was reduced to $1,800,000 and would be due January 1, 2023; and
4. the annual interest coupon rate was to be reduced to 6% for the years, 2018 - 2022; and
5. the market rate was determined to be 12% on January 1, 2018.

REQUIRED:

Question 1: Show how this debt with the new terms, is to be classified. Be sure to provide clear and sufficient computations to support your answer.

Question 2: In the books of Skeez, provide the appropriate journal entry/entries to record the transaction

(i) for the transfer of the property.

(ii) for recording the negotiated debt.

Question 3: Under the renegotiated terms, would Drumz International Bank make a gain or suffer a loss? Provide the journal entry which the bank would prepare to record this transaction in its books.