Module 13c Flashcards
What are the two ways to account for troubled debt?
Impairments or restructurings
Will an impairment on a restructured debt ever affect the debitors books?
No, only the creditors.
What are the two types of restucturings that are possible on troubled debt?
Settlement of the debt (including asset transfers and giving up common stock) and Modification of terms!
In an impairment what happens?
The creditor would dtermine that it was probable that the debtor was only going to be able to pay back a portion of the amount due.
How does the creditor calculate the loss on impairment on a non-interest barring note?
They take the carrying value of the note and subtract the PV of the portion that they would be able to pay (effective interest rate)
How does the creditor calculate the loss on impairment on an interest baring note?
Take the carrying value of the loan + accrued interest - PV of the future cash payments
What is the JE that the creditor would make?
Dr. Bad Debt Expense. Cr. Allowance
What happens aftre the creditor makes the JE on the bad debt?
They would make a revised amortization schedule for the remaining portion of the note. They would plus a discount amortized for the remaining period of the note
What is the JE that is recorded at note maturity for the creditor?
Dr. Cash. Dr. Allowance Cr. Note receivable
What is the JE that is recorded on the note at maturity for the debtor?
Dr. Note payable. Cr. Gain. Cr. Cash
What disclosure are required of the creditor on an impaired loan?
n/r w/ allowance account. Total balance of impaired loans principal. Creditors policy for interest revenue recognition. The average investment in impaired n/r. The policy for deciding which loans are reviewed for impairment. The reasons they believe a loan is impaired. Change in allowance accounts (SEC Registrants).
How are assets given in settlement treated by the debtor?
1) a gain is recognized for the difference between the carrying amount and the consideration(FV) given 2) determining the restructuring gain
How are assets received in settlement treated by the creditor?
Assets are received at full value excess is an ordinary loss
How is stock given in settlement treated by the debtor?
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