300824 Troubled Debt Restructurings TDR 2284 -2H1 Flashcards
Ace Corp. entered into a troubled debt restructuring (TDR) agreement with National Bank. National agreed to accept land with a carrying amount of $75,000 and a fair value of $100,000 in payment and cancellation of a note (from Ace) with a carrying amount of $150,000. Disregarding income taxes, what amount should Ace report as a gain from the restructuring in its income statement?
$75,000
$0
$25,000
$50,000
$50,000
In a transfer of assets to satisfy debt in a TDR, the debtor:
recognizes a gain or loss on the transfer of assets (equal to the difference between the fair value of $100,000 and recorded value of $75,000 of the asset transferred), or $25,000, and
recognizes a gain on the restructuring of a debt (equal to the difference between the $100,000 fair value of the asset and the $150,000 carrying value of the debt), or $50,000.
Even though a total gain of $75,000 is recognized on the income statement, the portion attributable to the restructuring is $50,000.
What is fair value?
the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date.
What is restructuring of debt?
2284.01
A restructuring of debt constitutes a troubled debt restructuring (TDR) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider.
This concession may stem from an agreement between the creditor and the debtor, or it may be imposed by law or a court.
What is debt?
2284.02
Debt is any contractual right to receive money or a contractual obligation to pay money on demand or on fixed or determinable dates that is already included as an asset or liability in the creditor’s or debtor’s balance sheet at the time of the troubled debt restructuring (TDR). Examples are accounts receivable or payable, notes, debentures, bonds, and related accrued interest.
How is a troubled debt restructuring (TDR) normally accomplished?
2284.03
A troubled debt restructuring is normally accomplished by one or a combination of the following:
a. Transfer from the debtor to the creditor of assets (e.g., real estate, receivables) to satisfy fully or partially the debt
b. Issuance of an equity interest to the creditor by the debtor to satisfy fully or partially the debt
c. Modification of terms of the debt, such as:
1. reduction in the interest rate for the remainder of the life of the debt
1. extension of maturity date(s) at an interest rate less than the current rate for new debt
1. reduction of the face amount or maturity amount f the debt
1. reduction of accrued interest
2284.04
Several examples
Several examples are developed in the following paragraphs to illustrate the proper accounting for TDR (troubled debt restructuring) under various plans. In each case, the creditor is identified as Co. C and the debtor is identified as Co. D.
2284.05
Transfer of Assets
In a transfer of assets to satisfy debt in a TDR (troubled debt restructuring), proper accounting by the debtor and the creditor is as follows:
Debtor
Recognize a gain or loss on the transfer of assets (equal to the difference between the fair and recorded values of the asset transferred).
Recognize a gain on the restructuring of a debt (equal to the difference between the fair value of the asset and the carrying value of the debt).
Creditor
Account for the asset received at
fair value, recognizing a loss
equal to the difference between
the fair value of the asset and
the recorded investment in the
receivable.
FASB ASC 470-60-35-2
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Troubled Debt Restructurings Study Guide
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Troubled Debt Restructurings Study Guide
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Troubled Debt Restructurings Study Guide
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Troubled Debt Restructurings Study Guide
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Troubled Debt Restructurings Study Guide
