At January 1, 2021, Brainard Industries, Inc., owed Second BancCorp $12 million under a 10% note due December 31, 2023. Interest was paid last on December 31, 2019. Brainard was experiencing severe financial difficulties and asked Second BancCorp to modify the terms of the debt agreement. After negotiation Second BancCorp agreed to: a. Forgive the interest accrued for the year just ended.
b. Reduce the remaining two years’ interest payments to $1 million each and delay the first payment until December 31, 2022.
c. Reduce the unpaid principal amount to $11 million.
Required: Prepare the journal entries by Brainard Industries, Inc., necessitated by the restructuring of the debt at (1) January 1, 2021; (2) December 31, 2022; and (3) December 31, 2023. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)

a. Forgive the interest accrued for the year just ended (2020)

January 1, 2021, unpaid interest is forgiven by bank

Dr Interest payable 1,200,000

    Cr Gain on troubled debt restructuring 1,200,000

b. Reduce the remaining two years’ interest payments to $1 million each and delay the first payment until December 31, 2022.

Even though the interest payments decrease from $11,000,000 x 10% = $1,100,000 to $1,000,000 (which results in $100,000 savings per year), no journal entry is necessary to record these savings.

But we must record accrued interests and their payment:

December 31, 2021, accrued interests on restructured bank loan

Dr Interest expense 1,000,000

    Cr Interest payable 1,000,000

December 31, 2022, interests paid to the bank

Dr Interest payable 1,000,000

Dr Interest expense 1,000,000

    Cr Cash 2,000,000

December 31, 2023, note payable plus interests repaid to the bank

Dr Notes payable 11,000,000

Dr Interest expense 1,100,000

    Cr Cash 12,100,000

Since the interest charged by the bank was reduced to $1 million for two years, it covered interest expense from 2021 and 2022, therefore, the interest charged during 2023 should be the normal interest rate = $11,000,000 x 10% = $1,100,000

c. Reduce the unpaid principal amount to $11 million.

January 1, 2021, unpaid principal amount reduced by $1 million

Dr Notes payable 1,000,000

    Cr Gain on troubled debt restructuring 1,000,000

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