F4 M6 Flashcards
Troubled Debt Restructuring
when is a gain from a transfer of assets recognized?
when there is an excess of the carrying amt of the payable over the fair value of assets given up
where are gains and losses on extinguishment of debt reported?
on the I/S for the period
recognize gain/loss on transfer of assets calc
FV of asset transferred
(NBV asset transferred)
= Gain/Loss
recognize gain of an asset transfer calc
carrying amt of payable
(FV asset transferred)
= gain
transfer of equity interest gain calc
carrying amt of the payable
(FV of equity transferred)
= gain
modification of terms
-a restructuring that does not involve a transfer of assets or equity interest
-restructuring accounted for prospectively
-debtor does not change carrying amt unless carrying amt > total future cash payments in new terms
total future cash payments
include principal and any accrued interest at time of restructuring under new payable terms
interest expense
-uses effective interest method
-discount rate where carrying amt = PV of future cash payments
future payments
future undiscounted cash payments < carrying amt = gain
-the debtor should reduce carrying amt as such
-all cash payments reduce carrying amt and no interest expense is recognized after date of restructure
when there are indeterminate future payments or future payments may exceed carrying amt?
-debtor does not recognize a gain or adjust carrying value of note
-debtor assumes future contingent payments will have to be made to remove a gain
combination of asset and equity interest transfer
-fair value of asset or equity interest first used to reduce carrying amt of payable
-gain or loss recognized between difference of fair value and carrying amt of any assets transferred
-no gain on restructuring unless carrying amt of payable > total future cash payments
-gains reported on income as part of continuing operations
when a loan is impaired?
-if it is probable that the creditor will be unable to collect all amts under original contract
-troubled debt restructuring is considered an impairment
when assets or equity are received
-creditor receives settlement, accounted for at fair value at time of restructuring
-fair value of receivable can be used if determinable than fair value of asset or equity
-in partial payment, creditor MUST use fair value of asset or equity received
when a loss is recognized upon receipt of assets or equity interests?
excess of receivable over fair value of asset received
treatment of loan impairment
-part of assessment of overall credit losses
-losses from troubled debt restructuring used in creditor’s estimate of its allowance for credit losses
-if discounted cash flow approach used, post-restructuring effective interest rate used as discount rate
impairment for credit losses journal entry
Dr. Bad debt expense
Cr. Allowance for credit losses
gain on restructuring of debt calc
total debt - amt settled for
journal entry on creditor side for troubled debt restructuring (transfer of assets)
Dr. Asset
Dr. Allowance for credit losses
Cr. Note receivable
Cr. Interest receivable
journal entry on debtor side for troubled debt restructuring (transfer of assets)
Dr. Note payable
Dr. Interest payable
Cr. Asset
Cr. Gain on disposal
Cr. Gain on restructuring
journal entry on debtor side for troubled debt restructuring (equity interest)
Dr. Note payable
Dr. Interest payable
Cr. C/S
Cr. APIC
Cr. Gain on restructuring
journal entry on creditor side for troubled debt restructuring (equity interest)
Dr. Equity investments
Dr. Allowance for credit losses
Cr. Note receivable
Cr. Interest receivable
gain on restructuring of debt when there is modification of terms
carrying amt of payable - total future cash payments
when have credit losses and maturity date of loan has been extended?
must discount to PV the total debt amt and subtract from carrying value of payable and posted to bad debt expense and allowance for credit losses
what is extinguishment?
when the debtor retires (calls) bonds prior to maturity
-debtor either pays it or is legally released from debt
bond extinguishment at maturity (debtor pays)
-carrying value of bond = face amt of bond and no gain or loss recognized
Dr. Bonds payable
Cr. Cash
when a bond is extinguished before maturity
-gain or loss recorded
-carrying value of bond - cash paid to extinguish the bond
Note: carrying value of bond is face amt - unamortized discount or = unamortized premium
in-substance defeasance
a company that puts securities into a irrevocable trust and pledges them for future payments of principal and interest
-liability is not extinguished and debtor liable
items that need to be adjusted in bond reacquisition in the F/S
1) unamortized bond issuance costs
2) unamortized discount or premium
3) difference between bond’s face value and reacquisition proceeds
gain or loss on extinguishment of debt calc
reacquisition price - net carrying amt
Note: positive value is a loss, negative value is a gain
reacquisition price calc
face amt * % of bond to redeem the bonds
net carrying amt of the bond calc
face value of bond - unamortized discount OR + unamortized premium - unamortized issuance cost
journal entry for extinguishment of discounted bond
Dr. Bonds payable
Dr. Loss on extinguishment of bonds
Cr. (unamortized) Discount on bonds payable and bond issuance costs
Cr. Cash
journal entry for extinguishment of premium bond
Dr. Bonds payable
Dr. Premium on bond payable
Cr. Cash
Cr. Gain on extinguishment of bonds
calculation of interest expense and use straight-line amortization of discount or premium
D = interest paid + amortization expense
P = interest paid - amortization expense
