M6 - Troubled Debt Restructuring and Extinguishment

Question 1

True or false: Many companies and agencies extinguish (or refund) long-term debt prior to maturity as a method of managing financial risk. The gain (retirement price less carrying amount of the old debt) will be included as part of continuing operations

Answer 1

True

Gains or losses on early retirement of debt must be recognized at the time of the transaction.

The gain is not reported net of income taxes.

The gain is not reported as a reduction of interest expense.

Question 2

A debtor 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.

What is an example of not “extinguishment of debt under GAAP”

Answer 2

Considering debt as “extinguished” (defeasing debt) by placing in an irrevocable trust is not GAAP for “extinguishment of debt.”

Question 3

When assets are transferred in a troubled debt restructuring, the asset (real estate) is adjusted to FV and an ordinary gain or loss recorded. Then, the gain or loss on restructuring is recorded as the difference between the debt and FV of asset transferred. (true or false)

Answer 3

True

Basically the restructuring gain or loss is the difference between the liability and the assets FV.

Question 4

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?

Answer 4

The total future cash payments

Carrying amount-Total future Cash Payments = Gain

Question 5

True or False: In a troubled debt restructuring, if the debtor achieves full settlement of the debt by transferring assets having a FMV that is less than 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 FMV of the asset at the date of transfer.

Answer 5

true

Question 6

True or False: A troubled debt restructuring exists when a creditor grants a concession to a debtor that it would not otherwise consider for economic or legal reasons (bankruptcy chapter 11 reorganization).

Answer 6

True

Gain is recognized by the debtor if the face amount of the payable exceeds the FMV of assets and/or equity transferred.