Liabilities

Question 1

How is G/L recognized for creditor in debt restructuring?

Answer 1

Loss = difference in the current BV of NR and present value of future cash flows, based on original interest rate.
Interest revenue = original interest rate x BV of NR

Question 2

How is G/L recognized for debtor in debt restructuring?

Answer 2

If current BV of NP (principal plus accrued interest) > total cash paid under new agreement, recognize gain equal to difference
Do not use present value to calculate total cash received

Question 3

When can a company record short term obligations as L/T?

Answer 3

Must demonstrate intent and ability by either:

1. Actually issuing L/T debt after B/S date but before F/S issued
2. Signing a firm agreement to refinance

Question 4

How are Loss Contingencies accounted for?

Answer 4

Remote - don’t disclose or accrue
Reasonably Possible - disclose but don’t accrue
Probable and Estimable - disclose and accrue
Probable and Not Estimable - disclose and don’t accrue

If range, accrue most likely to occur
If all are as likely as rest, accrue the minimum and disclose range

Question 5

How are Gain Contingencies accounted for?

Answer 5

Remote - don’t disclose or accrue
Reasonably Possible - disclose but don’t accrue
Probable and Estimable - disclose but don’t accrue

Question 6

When does a debtor record a restructuring involving modification of terms?

Answer 6

If CV > total future cash flows per the modification
Gain = CV - total future cash flows

If CV < total future cash flows
No G/L, adjustment to interest rate with excess as interest expense