Troubled Debt Restructuring

Question 1

The effective interest rate for a loan restructured in a troubled debt restructuring is?

Answer 1

Under troubled debt restructuring, the effective interest rate is based on the original
contractual rate, rather than on the current interest rate of the rate specified in the
restructuring agreement. Note that this is the exception to the rule to effective interest for most loans not related to troubled debt restructuring.

Note: Under some circumstances, a debtor’s interest could be a new rate, and thus “the rate specified in the restructuring agreement” could be the correct answer, but the best answer choice is “the original contractual rate.”

Question 2

A debtor in a troubled debt restructuring is required to recognize a gain measure as

Answer 2

“the excess of (i) the carrying amount of the payable settled…over (ii) the FV of the assets transferred to the creditor.”