Troubled Debt

Question 1

What is a “Troubled Debt Restructure (TDR)?

Answer 1

Occurs when a debtor is unable to make the required payments under the loan agreement and the creditor grants a concession that would otherwise not be made.

Question 2

What is the amount of interest to be recognized after a troubled debt restructure that modifies the terms of the original debt such that the sum of restructured cash flows is less than the book value of the original debt?

Answer 2

No interest is recognized; all payments are considered principal payments

Question 3

What is the international accounting standard treatment of settlement troubled debt restructures?

Answer 3

Same as U.S. accounting but is considered an extinguishment

Question 4

What is the amount of interest to be recognized after a troubled debt restructure modifies the terms of the original debt such that the sum of restructured cash flows is greater than the book value of the original debt?

Answer 4

Difference between the sum of restructured cash flows and the book value of the original debt

Question 5

List the two categories of modification of terms debt restructures for international accounting standards

Answer 5

Significant modification and not significant modification

Question 6

Describe the debtor’s recording of a settlement restructure

Answer 6

1. ) Gain = book value of debt + unpaid accrued interest - market value of consideration transferred;
2. ) Gain/loss on disposal of assets transferred;
3. ) Remove debt from books;
4. ) Record any stock issued at market value.

Question 7

What is the nature of restructured cash flows for a troubled debt restructure that modifies the terms of the original debt such that the sum of restructured cash flows is less than the book value of the original debt?

Answer 7

They are all treated as principal payments. Records a gain for the difference between Book value and the nominal sum of restructured cash flows. Reduces the carrying value of the debt to the nominal sum of restructured cash flows.

Question 8

What requirements must exist for a debt restructuring to be troubled?

Answer 8

Creditor makes a concession, and debtor must be in financial difficulty

Question 9

Describe the post-restructure interest rate for a troubled debt restructure that modifies the terms of the original debt such that the sum of restructured cash flows is greater than the book value of the original debt

Answer 9

Computes new rate of interest equating the present value of restructured cash flows and the book value of the debt. Interest expense is then based on the new rate for the remainder of the loan.

Question 10

In a debt restructure, how does the creditor account for the restructure?

Answer 10

1. ) Records an ordinary loss equal to difference between BV of the receivable and Market value of assets or stock received
2. ) Removes receivable from book
3. ) Records assets at market value