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Chapter 14: 14-26Q (page 753)

What are the general rules for measuring gain or loss by both creditor and debtor in a troubled-debt restructuring involving a settlement?

Short Answer

Expert verified

In case of gain, the debtor is needed to ascertain the surplus of the carrying value of the payable over the actual value of the assets. Similarly, in case of loss, the creditor is needed to ascertain the excess of the receivable over the true value of those assets.

Step by step solution

01

Meaning of troubled-debt restructuring

A troubled-debt restructuring occurs when a creditor allows the debtor causes of financial troubles adjustments that it would not have otherwise regarded. A troubled debt restructuring comprises either settlement of debt at a value lower than its carrying value or prolongation of debt with an alteration.

02

General rules for measuring gain or loss by both creditor and debtor

A debt obligation in a troubled debt restructuring is settled by transferring receivables or by issuing the debtor's stock. In these circumstances, the non-cash assets should be responsible for at fair value. The debtor identifies again that it is equivalent to the value of the surplus, and the creditor generally would exact the loss against the allowance for bad debts accounts. Moreover, the debtor identifies a surplus (gain) or deficit (loss) on the settlement of assets so that the actual value of those assets is different from their book value.

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Most popular questions from this chapter

Using the same information as in E14-22, answer the following questions related to American Bank (creditor).

Instructions

  1. What interest rate should American Bank use to calculate the loss on the debt restructuring?
  2. Compute the loss that American Bank will suffer from the debt restructuring. Prepare the journal entry to record the loss.
  3. Prepare the interest receipt schedule for American Bank after the debt restructuring.
  4. Prepare the interest receipt entry for American Bank on December 31, 2019.
  5. What entry should American Bank make on January 1, 2021?

Samson Corporation issued a 4-year, \(75,000, zero-interest-bearing note to Brown Company on January 1, 2017, and received cash of \)47,664. The implicit interest rate is 12%. Prepare Samson鈥檚 journal entries for (a) the January 1 issuance and (b) the December 31 recognition of interest.

On June 30, 2009, County Company issued 12% bonds with a par value of \(800,000 due in 20 years. They were issued at 98 and were callable at 104 at any date after June 30, 2017. Because of lower interest rates and a significant change in the company鈥檚 credit rating, it was decided to call the entire issue on June 30, 2018, and to issue new bonds. New 10% bonds were sold in the amount of \)1,000,000 at 102; they mature in 20 years. County Company uses straight-line amortization. Interest payment dates are December 31 and June 30.

Instructions

  1. Prepare journal entries to record the redemption of the old issue and the sale of the new issue on June 30, 2018.
  2. Prepare the entry required on December 31, 2018, to record the payment of the first 6 months鈥� interest and the amortization of premium on the bonds.

Question: Under IFRS, bonds issuance costs, including the printing costs and legal fees associated with the issuance, should be:

  1. expensed in the period when the debt is issued.
  2. recorded as a reduction in the carrying value of bonds payable.
  3. accumulated in a deferred charge account and amortized over the life of the bonds.

d.reported as an expense in the period the bonds mature or are redeemed.

Question: (a) From what sources might a corporation obtain funds through long-term debt? (b) What is a bond indenture? What does it contain? (c) What is a mortgage?
See all solutions

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