13-C: Debt Restructures

3. The following information pertains to the transfer of real estate pursuant to a troubled debt restructuring by Knob Co. to Mene Corp. in full liquidation of Knob's liability to Mene: Carrying amount of liability liquidated: $150,000 Carrying amount of real estate transferred: $100,000 Fair Value of Real estate transferred: $90,000 What amount should Knob report as a gain (loss) on transfer of real estate? a. $(10,000) b. $0 c. $50,000 d. $60,000

Correct Answer: A) $(10,000)

1. For a troubled debt restructuring involving only a modification of terms, which of the following items specified by the new terms would be compared to the carrying amount of the debt to determine if the debtor should report a gain on restructuring? a. The total future cash payments. b. The present value of the debt at the original interest rate. c. The present value of the debt at the modified interest rate. d. The amount of future cash payments designated as principal repayments.

Correct Answer: A) The total future cash payments. Notes (a) In a restructuring involving only a change in terms, the total future cash payments should be compared to the carrying amount to determine if a gain should be recognized. Answers (b) and (c) are incorrect because the undiscounted future cash flows are compared to the carrying amount. Answer (d) is incorrect because the total amount of future cash flows are compared to the carrying amount.

5. Colt, Inc. is indebted to Kent under an $800,000, 10%, four-year note dated December 31, year 1. Annual interest of $80,000 was paid on December 31, year 2 and year 3. During year 4, Colt experienced financial difficulties and is likely to default unless concessions are made. On December 31, year 4, Kent agreed to restructure the debt as follows: -Interest of $80,000 for year 4, due 12/31/Y4, was made payable 12/31/Y5 -Interest for Y5 was waived -The principal amount was reduced to $700,000 Assume Colt does not elect the fair value option for reporting the debt modification. How much should Colt report as a gain in its income statement for the year ended December 31, year 4? a. $0 b. $100,000 c. $60,000 d. $120,000

Correct Answer: B) $100,000 Notes (b) The requirement is to determine the amount of gain to be recognized from a troubled debt restructure. If the debt is continued with a modification of terms, a gain is recognized by the debtor if the future cash payments on the debt are less than the carrying value of the debt. For troubled debt restructures, carrying value is defined as the principal amount ($800,000) plus accrued interest ($80,000), or $880,000. The future payments total $780,000 ($700,000 reduced principal and $80,000 interest). The $100,000 difference ($880,000 - $780,000) is recognized as a restructuring gain.

2. The following information pertains to the transfer of real estate pursuant to a troubled debt restructuring by Knob Co. to Mene Corp. in full liquidation of Knob's liability to Mene: Carrying amount of liability liquidated: $150,000 Carrying amount of real estate transferred: $100,000 Fair Value of Real estate transferred: $90,000 What amount should Knob report as a gain (loss) on restructuring of payables? a. $(10,000) b. $0 c. $50,000 d. $60,000

Correct Answer: D) $60,000