Debt (Retirement and Modification) Flashcards Preview

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Flashcards in Debt (Retirement and Modification) Deck (36):
1

How are gains/losses from extinguishment of debt reported on the income statement?

Recognized as components of income from continuing operations.

2

List the conditions that must exist for debt to be extinguished.

  1. Debtor pays creditor and is relieved of obligation;
  2. Debtor is legally released from being primary obligor.

3

List the steps to retire debt on the books.

  1. Record interest, amortization of discount/premium, issue costs to date of retirement;;
  2. Remove debt and related accounts;
  3. Record gain or loss.

4

How do you calculate 

Gain on Debt Extinguishment?

Gain is the difference between:

a) Net Bond Liability (Face — unamortized costs)

           LESS

 b) Amount paid to retire the bonds

Gain on Bond Retirement

 

5

How do you calculate 

Loss on Debt Extinguishment?

Cash Paid

- Debt Book Value

+ Unamortized Debt Issue Costs

Loss on Debt Extinguishment

6

Where are gains and losses

on debt extinguishment reported?

They are reported in 

Other Income

7

How do you calculate 

Debt Book Vaue?

Total Face Value

+ Unamortized premium

OR

- Discount

Debt Book Value

8

What is the Journal Entry

at Bond Retirement?

Bonds Payable

Bonds Premium

    Bond Issue Cost

    Cash

    Gain

Gain or Loss is a "plug" figure 

9

How do you determine the related periods remaining for 

Bond Issue Costs?

Bond Periods Remaining

(Bond yrs x # of pmts/year) — # of periods passed

____(divided by)___________

Original Bond Period

(Bond years x # of pmts per year)

 

10

How do you determine the bond carrying amount

at bond retirement?

Bond Face value amount

— unamortized costs 

= Bond Carrying Amount at Retirement

 

11

What happens when a liability is retired for 

less than its book value?

A gain is recorded because the firm reduces its liabilities more than the reduction in its cash or other assets used for retirement.

12

What is the purpose of the premium at

debt retirement?

The unamortized premium is a component of the book value at retirement. A premium increases the net book value of the bonds because more was paid in than the face value when the bonds were originally issued.

13

Weald Co. took advantage of market conditions to refund debt. This was the fifth refunding operation carried out by Weald within the last four years.

The excess of the carrying amount of the old debt over the amount paid to extinguish it should be reported as a(an)...

Part of continuing operations

This gain is included in income from continuing operations, as would other gains and losses such as on equipment disposal.

14

Where do we report gains or losses from the early extinguishment of debt?

The gain or loss on retirement of debt is included in income from continuing operations.

15

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?

No interest is recognized; all payments are considered principal payments.

16

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

1) TDR Modification Type 1

     Significant modification

2) TDR Modification Type 2

     Not significant modification.

17

What is the difference between

US GAAP vs IFRS on troubled debt?

  1. No troubled identification
  2. Siginificant or insignificant modification

18

What is the accounting treatment of TDR under IFRS?

Settlements are treated the same way as under U.S. standards.

19

In a modification of the terms, TDR type II (sum of new flows > book value of debt), what amount of gain is recognized by the debtor?

None

Although the debtor has an economic gain (the creditor is making a concession), GAAP requires that the debtor compute the new rate of interest based on the restructured cash flows and recognize interest expense over the note term.

No gain is recognized by the debtor.

20

What is the Journal Entry for

Troubled Debt Modification Type 1

at modification date?

Interest Payable

Notes Payable

          Gain

          Notes Payable (New face + Interest)

 

Close out original payable accounts

Gain/Loss is a plug figure

21

What is the Journal Entry 

for the new payments on the TDR amount?

Year 1

Note Payable (New Face x new interest %)

        Cash

Year 2

Note Payable (NF x NI %) + New Face

        Cash

This is NOT an interest expense but a straight reduction on the note payable amount. It's not considered interest because the debtor is already paying the note LOWER than its original amount.

Last payment includes Face amount and "Interest".

 

22

Why is TDR Modification Type 1 considered a "Substantial Modification"?

It's considered a substantial modification because the debtor is paying less than the original amount they owed.

The new "interest" payments are not really interest payments because they are paying less than what they originally owed.

That's why the JE is the following takes down the Note Payable account instead of book to interest expense.

 Note Payable

     Cash

23

What is considered a

Gain or Loss in debt restructuring?

GAIN = Debtor pays back less for total money owed

LOSS = Debtor pays back more for total money owed

 

 

24

How do you compute the interest expense for

TDR Modification Type 2?

If the Sum of Restructured Cash Flows is > BV, then a new rate must be computed.

  1. PV Factor = Original Note / New Payment
  2. USe PV Factor to find PV Rate
  3.  Interest Expense = Original Note x PV Rate

 

25

What similarities does US GAAP and IFRS share on Troubled Debt Restructuring?

Settlements are treated the same way

Both sets of standards treat settlements as extinguishments with a gain to the debtor for the difference between debt book value and fair value of consideration paid.

26

A debtor and a creditor have negotiated new terms on a note.

How can you determine whether the restructuring is a troubled debt restructure?

If the present value of the restructured flows using the original interest rate is less than the book value of the debt at the date of the restructure

Under the terms of this answer, the creditor is receiving a stream of cash flows with a present value less than what is currently owed and is making a concession.

27

What is an identifying factor of

TDR Modification II?

Sum of new restructured cash flows > BV of Debt

No Gain or Loss Recognized.

Although the debtor has an economic gain (the creditor is making a concession), GAAP requires that the debtor compute the new rate of interest based on the restructured cash flows and recognize interest expense over the note term. No gain is recognized by the debtor.

28

Does a debtor recognize a gain in TDR Modification Type II?

No

Although the debtor has an economic gain (the creditor is making a concession), GAAP requires that the debtor compute the new rate of interest based on the restructured cash flows and recognize interest expense over the note term. No gain is recognized by the debtor.

29

Define debt covenant compliance.

Steps taken by debtor to meet the restriction and reporting such compliance.

30

What is the classification of liabilities that are due on demand?

Current Liability.

31

List some examples of specific attributes in a covenant.

  • Minimum Current Ratio 
  • Maximum Debt to Equity Ratio.

32

Define covenant-lite loan.

Loan with less stringent restrictions.

33

Give an example of a response by a creditor if the debt covenant is violated by the debtor.

Require the debtor to pay the debt or refinance the debt.

34

Define debt covenant.

Restriction on debtor and possible responses by creditor.

35

What is the classification of liability subject to a subjective acceleration clause?

Current if it is possible the debt will be called; noncurrent if a remote chance exists of calling the debts.

36

What is the classification of a liability callable on demand if debt covenant is violated and it is probable that the debtor will cure violation?

Noncurrent Liability.