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Accounting For Troubled Debt
Accounting For Troubled Debt
Accounting For Troubled Debt
G-1
Warfield
Wyegandt
Kieso
APPENDIX F
ACCOUNTING FOR TROUBLED
DEBT
INTERMEDIATE ACCOUNTING
Principles and Analysis
2nd Edition
Appendix
G-2
Troubled
Troubled Debt
Debt
Appendix
G-3
Troubled
Troubled Debt
Debt
Impairments
A loan is impaired when it is probable the creditor will
not collect all amounts due (both principal and interest).
Appendix
G-4 O 1 Describe the accounting for a loan impairment.
Troubled
Troubled Debt
Debt
Impairments
If considering a loan impaired, the creditor should measure
the loss due to the impairment as the difference between
the investment in the loan (generally the principal plus
accrued interest) and the expected future cash flows
discounted at the loan’s historical effective interest rate.
Appendix
G-5 O 1 Describe the accounting for a loan impairment.
Troubled
Troubled Debt
Debt -- Impairments
Impairments
Appendix
G-6 O 1 Describe the accounting for a loan impairment.
Troubled
Troubled Debt
Debt -- Impairments
Impairments
Show how Community Bank (creditor) and Prospect (debtor)
record these transactions on December 31, 2008
Illustration G-3
Appendix
G-7 O 1 Describe the accounting for a loan impairment.
Troubled
Troubled Debt
Debt -- Impairments
Impairments
Schedule of Interest and Discount Amortization (Before
Impairment) Illustration G-4
Illustration G-3
Appendix
G-8 O 1 Describe the accounting for a loan impairment.
Troubled
Troubled Debt
Debt -- Impairments
Impairments
Assume Community Bank determines that Prospect will
probably pay back only $300,000 of the principal at
maturity. Community Bank declares the loan impaired.
Appendix
G-9 O 1 Describe the accounting for a loan impairment.
Troubled
Troubled Debt
Debt -- Impairments
Impairments
The loss due to impairment is the difference between the
present value of the expected future cash flows and the
recorded carrying amount of the investment in the loan.
Illustration G-6
Illustration G-7
Appendix
G-10 O 1 Describe the accounting for a loan impairment.
Troubled
Troubled Debt
Debt
Restructurings
A troubled-debt restructuring occurs when a creditor “for
economic or legal reasons related to the debtor’s financial
difficulties grants a concession to the debtor that it would
not otherwise consider.”
Appendix
G-11 O 2 Describe the accounting for debt restructuring.
Troubled-Debt
Troubled-Debt Restructuring
Restructuring
Settlement of Debt
Involve either a:
Transfer of noncash assets (real estate,
receivables, or other assets) or
Issuance of the debtor’s stock.
Appendix
G-12 O 2 Describe the accounting for debt restructuring.
Troubled-Debt
Troubled-Debt Restructuring
Restructuring
Appendix
G-13 O 2 Describe the accounting for debt restructuring.
Troubled-Debt
Troubled-Debt Restructuring
Restructuring
EG-1 Prepare journal entries for Larisa Nieland
Company and First State Bank to record this debt
settlement.
Larisa Nieland Company (Debtor):
Notes Payable 200,000
Interest Payable 18,000
Accumulated Depreciation 221,000
Machine 390,000
Gain on Disposition of Machine 21,000 a
Gain on Debt Restructuring 28,000 b
a $190,000 – ($390,000 – $221,000) = $21,000.
b ($200,000 + $18,000) – $190,000 = $28,000.
Appendix
G-14 O 2 Describe the accounting for debt restructuring.
Troubled-Debt
Troubled-Debt Restructuring
Restructuring
EG-1 Prepare journal entries for Larisa Nieland
Company and First State Bank to record this debt
settlement.
First State Bank (Creditor):
Machine 190,000
Allowance for Doubtful Accounts 28,000
Notes Receivable 200,000
Interest Receivable 18,000
Appendix
G-15 O 2 Describe the accounting for debt restructuring.
Troubled-Debt
Troubled-Debt Restructuring
Restructuring
EG-1 Assume instead that Larisa Nieland decides to grant
15,000 shares of its common stock ($10 par) which has a
fair value of $190,000 in full settlement of the loan
obligation. If First State Bank treats Larisa Nieland’s
stock as a trading investment, prepare the entries to
record the transaction for both parties.
Appendix
G-17 O 2 Describe the accounting for debt restructuring.
Troubled-Debt
Troubled-Debt Restructuring
Restructuring
Modification of Terms
1. Reduction of the interest rate.
2. Extension of maturity date of the face amount of debt.
3. Reduction of the face amount of the debt.
4. Reduction or deferral of any accrued interest.
Appendix
G-18 O 2 Describe the accounting for debt restructuring.
Debtor
Troubled-Debt
Troubled-Debt Restructuring
Restructuring No Gain
Appendix
G-22 O 2 Describe the accounting for debt restructuring.
Creditor
Troubled-Debt
Troubled-Debt Restructuring
Restructuring No Gain
Appendix
G-23 O 2 Describe the accounting for debt restructuring.
Creditor
Troubled-Debt
Troubled-Debt Restructuring
Restructuring No Gain
EG-3 Compute the loss that Firstar Bank will suffer from
the debt restructuring. Prepare the journal entry to record
the loss.
Appendix
G-25 O 2 Describe the accounting for debt restructuring.
Creditor
Troubled-Debt
Troubled-Debt Restructuring
Restructuring No Gain
Cash 160,000
Allowance for Doubtful Accounts 25,510
Interest Revenue 185,510
Cash 1,600,000
Allowance for Doubtful Accounts 400,000
Note Receivable 2,000,000
Appendix
G-26 O 2 Describe the accounting for debt restructuring.
Debtor
Troubled-Debt
Troubled-Debt Restructuring
Restructuring Gain
Appendix
G-27 O 2 Describe the accounting for debt restructuring.
Debtor
Troubled-Debt
Troubled-Debt Restructuring
Restructuring Gain
Appendix
G-29 O 2 Describe the accounting for debt restructuring.
Debtor
Troubled-Debt
Troubled-Debt Restructuring
Restructuring Gain
Appendix
G-30 O 2 Describe the accounting for debt restructuring.
Creditor
Troubled-Debt
Troubled-Debt Restructuring
Restructuring Gain
Appendix
G-31 O 2 Describe the accounting for debt restructuring.
Creditor
Troubled-Debt
Troubled-Debt Restructuring
Restructuring Gain
Appendix
G-33 O 2 Describe the accounting for debt restructuring.
Creditor
Troubled-Debt
Troubled-Debt Restructuring
Restructuring Gain
Appendix
G-35 O 2 Describe the accounting for debt restructuring.
Copyright
Copyright
Copyright © 2008 John Wiley & Sons, Inc. All rights reserved.
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information contained herein.
Appendix
G-36