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Chapter 14: Q.14-30Q (page 753)

Question: Under what circumstances would a transaction be recorded as a troubled-debt restructuring by only one of the two parties to the transaction?

Short Answer

Expert verified

Answer

A transaction related to troubled-debt restructuring is listed by the debtor only if the value for which debt is settled is less than its accounting value on the books of the debtor but is equivalent to or higher than the accounting value on the books of the creditor.

Step by step solution

01

Meaning of troubled-debt restructuring

Trouble-debt restructuring refers to the debt restructuring wherein a creditor, for monetary or statutory reasons associated with a debtor鈥檚 economic crisis, permits allowances to the debtor that it would not have else regarded.

02

Conditions for recording a transaction as a troubled-debt restructuring

Situations under which a transaction as a troubled debt restructuring is recorded include:

  • Debtor lists the transaction as a troubled-debt restructuring provided the value for which the debt is settled is lower than its asset value on the debtor books but is greater or similar to the asset value on the creditor books.
  • Moreover, the condition created with the help of discounted as compared to non-discounted cash flows by debtors and creditors, this circumstance can take place when a creditor or debtor has been replaced with one of the groups to the actual transaction.

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Most popular questions from this chapter

Vargo Corp. owes \(270,000 to First Trust. The debt is a 10-year, 12% note due December 31, 2017. Because Vargo Corp. is in financial trouble, First Trust agrees to extend the maturity date to December 31, 2019, reduce the principal to \)220,000, and reduce the interest rate to 5%, payable annually on December 31.

Instructions

  1. Prepare the journal entries on Vargo鈥檚 books on December 31, 2017, 2018, 2019.
  2. Prepare the journal entries on First Trust鈥檚 books on December 31, 2017, 2018, 2019.

(L01) Assume the bonds in BE14-2 were issued at 98. Prepare the journal entries for (a) January 1, (b) July 1, and (c) December 31. Assume The Colson Company records straight-line amortization semiannually.

Coldwell, Inc. issued a \(100,000. 4-years, 10% note at face value to Flint Hills Bank on January 1, 2017, and received \)100,000 cash. The note requires annual interest payments each December 31. Prepare Coldwell鈥檚 journal entries to record (a) the issuance of the note and (b) the December 31 interest payment.

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.

Under what conditions of bond issuance do a discount on bonds payable arise? Under what conditions of bond issuance does a premium on bonds payable arise?
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