Financial 5 - Troubled Debt Restructuring

Question 1

Gains and Losses on Bond Retirements

Answer 1

• Gains and losses on bond retirements are reported in income from continuing operations

If the settlement price is greater than the face value of the debt and the face value is greater than the book value, therefore, a loss will be recognized on the transaction

If the settlement/retirement price is less than the carrying/book value, then a gain will be recognized in continuing operations

Question 2

Formula to Find Gain and Loss on Bond Retirement

Answer 2

Gain:

Bonds at face value
ADD: Unamortized Bond Premium
Carrying Value of Bonds to be retired
LESS: Cash Paid (Bonds * acquisition price)
Gain on Bond Retirement

Question 3

Formula to Find Gain or Loss on Debt Extinguishment

Answer 3

LOSS:

Carrying Value
     Face
     LESS: Unamortized discount (based on term of bond [period of time after extinguishment])
     LESS: Unamortized bond issue cost
Net Carrying Value

Reacquisition Price - Net Carrying Value = Total loss on extinguishment

** Early extinguishment takes into account only the bonds that are retired early. This takes into consideration the unamortized issue costs (must respectively reduce the face value by percentage of bonds retired)

Question 4

Defining “Extinguishment of Debt”

Answer 4

A creditor is relieved of its obligation to the creditor only by:

1. Paying the creditor
2. Being released of the debt judicially or by the creditor

Considering debt as “extinguished” by placing cash in an irrevocable trust is not GAAP for “extinguishment of debt”

Question 5

Modification of Terms

Answer 5

** Carrying Amount - Total future cash payments = GAIN

Question 6

Troubled Debt Restructuring

Answer 6

RULE: IN TDR, if the debtor achieves full settlement of the debt by transferring assets having a FMV that is less that the amount of the debt, a gain is recognized for the difference between the Carrying value of the payable at the date of transfer and the fair market value of the asset at the date of transfer

CV of Debt
LESS: FMV of the asset
GAIN