CPA - FAR - Troubled Debt

During year 2, Colt Co. experienced financial difficulties and was likely to default on a $1,000,000, 15%, three-year note dated January 1, year 1, payable to Cain National Bank. On December 31, year 2, the bank agreed to settle the note and unpaid year 2 interest of $150,000 for $820,000 cash payable on January 31, year 3. What is the amount of gain, before income taxes, from the debt restructuring? $0 $150,000 $180,000 $330,000

$330,000 Gain = book value of note plus interest − cash paid Gain = $1,000,000 + $150,000 − $820,000 = $330,000.

On 12/31/x1, DInc. owed CInc. the full face value of a 10%, $350,000 note that requires interest payments annually on Dec. 31. DInc. paid the interest due 12/31/x1, but is experiencing financial problems and requested that the loan agreement be restructured. Three years remain in the note term as of today. The two parties agree to the following restructuring agreement: DInc. will pay no more interest. DInc. will pay $196,270 one year from today, and that same amount again two years from today (total of two payments of $196,270). What amount of interest expense will DInc. recognize on 12/31/x2 when the firm makes the first of two payments of $196,270? - Factor for PV Ordinary Annuity for 2 periods at 8%= 1.78326 - Factor for PV Annuity Due for 2 periods at 8%= 1.92593 - Factor for Single Sum for 2 periods at 8%= .85734

1) We see that the sum of two $196,270 pmts exceeds $350,000, which means we need to determine the new interest rate and discover, if it is even a Troubled Debt restructure issue (the new interest rate supposed to be be lower than old one) 2)$350,000/196,270 = pvA, m, 2) = 1.78326. 2) Find this factor as given for 8% 3) Principal Amt $350,000x 0.08 = $28000 (Interest expense D will recognize when they will pay first of two pmts of $196,270)

On December 30, 20x4, Hale Corp. paid $400,000 cash and issued 80,000 shares of its $1 par value common stock to its unsecured creditors on a pro rata basis pursuant to a reorganization plan under Chapter 11 of the bankruptcy statutes. Hale owed these unsecured creditors a total of $1,200,000. Hale's common stock was trading at $1.25 per share on December 30, 20x4. As a result of this transaction, Hale's total stockholders' equity had a net increase of $1,200,000 $800,000 $100,000 $80,000

Answer: $800,000 Explanation: 1) 80,000 x 1.25 = $100,000 (Market Value of the Stock issued to the creditors) 2) 400,000 + 100,000 = 500,000 (Total consideration given to creditors, including $) 3) $1200000 - 500000 = 700,000 (the gain on settling the debt) 4) The gain increases owners' equity by way of net income. The issuance of stock is recorded at market value, $100,000. Thus, the total owners' equity increase is $800,000 ($700,000 + $100,000).

Choose the correct statement regarding the accounting treatment of troubled debt restructures (TDRs) under international accounting standards (IAS). - Settlements are treated the same way as under U.S. standards. - Modification of terms TDRs are treated the same way as under U.S. standards. - A significant modification of terms for IAS is treated as a modification of terms type II under U.S. standards. - A non-significant modification of terms for IAS is treated as a modification of terms type I under U.S. standards.

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. Correct Answer is "Settlements are treated the same way as under U.S. standards."

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. Simply put: if the creditor is receiving a stream of cash flows with a present value less than what is currently owed and is making a concession.

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? Or simply read - What do we compare to the carrying value of the old debt to determine if we have a gain id we'll restructure?

In this type of restructuring (Modification) we compare Currying Value of old debt (a.k.a. Current amount of Principle + Accrued Interest) to Future Payments under New Terms (no TVM) or the total undiscounted future payments for principal and interest. Note that if Future pmts under new terms < than current obligation, the Debtor writes down carrying amt of the liability by the amount of the difference ---> recognizes a GAIN.

How do we determine the amount of an ordinary gain (loss) on transfer on disposal ?

Key word: Transfer In this case, we don't even look at the original debt. We simply compare the Book Value and Fair Value of the transferred asset. F.e. - Carrying amount of liability liquidated$150,000 - Carrying amount of real estate transferred100,000 - Fair value of real estate transferred90,000 Ordinary loss on transfer will be: 90,000 - 100,000 = (10,000)

Wood Corp., a debtor-in-possession under Chapter 11 of the Federal Bankruptcy Code, granted an equity interest to a creditor in full settlement of a $28,000 debt owed to the creditor. At the date of this transaction, the equity interest had a fair value of $25,000. What amount should Wood recognize as a gain on restructuring of debt?

The gain is the difference between the debt book value of $28,000 and the fair value of the equity interest transferred ($25,000) or $3,000.

Nu Corp. agreed to give Rand Co. a machine in full settlement of a note payable to Rand. The machine's original cost was $140,000. The note's face amount was $110,000. On the date of the agreement, the note's carrying amount was $105,000, and its present value was $96,000. The machine's carrying amount was $109,000, and its fair value was $96,000. What amount of net gain (or losses) should Nu recognize?

We determine the Net loss listed by comparing the carrying amount of the liability and the carrying amount of the machine. Nu has a gain of $9,000 on the note settlement, which is the difference between the liability carrying value ($105,000) and the fair value of the consideration given to extinguish the debt ($96,000). Nu also has a disposal loss on the machine. An ordinary loss of $13,000 is recognized and equals the difference between the machine's carrying value ($109,000) and its fair value ($96,000).

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

We don't recognize a gain. Only recognize the interest at lower rate. Debtor compute the new rate of interest based on the restructured cash flows.