financial dif- ficulty

(Restructure of Note under Di f ferent Circumstances) Halvor Corporation is having financial dif- ficulty and therefore has asked Frontenac National Bank to restructure its $5 million note outstanding. The present note has 3 years remaining and pays a current rate of interest of 10%. The present market rate for a loan of this nature is 12%. The note was issued at its face value.

Instructions

^{P r esented below and on the next page a r e four independent situations. P r epa r e the journal entry that}

^{Halvor and F r ontenac National Bank would make for each of these r est r ucturings.}

(a) Frontenac National Bank agrees to take an equity interest in Halvor by accepting common stock valued at $3,700,000 in exchange for relinquishing its claim on this note. The common stock has a par value of $1,700,000.

^{(b) F r ontenac National Bank ag r ees to accept land in exchange for r elinquishing its claim on this note.}

^{The land has a book value of $3,250,000 and a fair value of $4,000,000.}

^{(c) F r ontenac National Bank ag r ees to modify the terms of the note, indicating that Halvor does not}

^{have to pay any inte r est on the note over the 3-year period.}

(d) Frontenac National Bank agrees to reduce the principal balance due to $4,166,667 and require inter- est only in the second and third year at a rate of 10%.