ExpertHard1 markMultiple Choice
CPA · Question 32 · Area II: Balance Sheet Accounts
A company modifies the terms of its debt. The modification is treated as a 'troubled debt restructuring' involving only a modification of terms (no asset transfer). The total future cash payments (undiscounted) under the new terms are LESS than the carrying amount of the debt. <br/>How should the debtor account for this?
A company modifies the terms of its debt. The modification is treated as a 'troubled debt restructuring' involving only a modification of terms (no asset transfer). The total future cash payments (undiscounted) under the new terms are LESS than the carrying amount of the debt. <br/>How should the debtor account for this?
Answer options:
A.
Recognize no gain and amortize the difference as interest
B.
Reduce the carrying amount to the total future cash payments and recognize a gain
C.
Recognize a loss
D.
Extinguish the debt and record a new liability at fair value
How to approach this question
Compare Carrying Amount vs. Total Future Cash Flows (Undiscounted). <br/>If CF < CV: Gain = CV - CF. New CV = CF. Interest Exp = 0. <br/>If CF > CV: No Gain. New effective interest rate calculated.
Full Answer
B.Reduce the carrying amount to the total future cash payments and recognize a gain✓ Correct
B
In a Troubled Debt Restructuring (modification of terms), if the undiscounted total future cash payments are less than the carrying amount of the debt, the debtor must write down the debt to the total future cash payments amount and recognize a gain for the difference. No interest expense is recognized in the future.
Common mistakes
Confusing the two TDR scenarios (Gain vs No Gain).
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