Deck 23: Appendix G: Accounting for Troubled Debt

Question 1

In a troubled debt restructuring in which the debt is continued with modified terms, a gain should be recognized at the date of restructure, but no interest expense should be recognized over the remaining life of the debt, whenever the

A) carrying amount of the pre-restructure debt is less than the total future cash flows.
B) carrying amount of the pre-restructure debt is greater than the total future cash flows.
C) present value of the pre-restructure debt is less than the present value of the future cash flows.
D) present value of the pre-restructure debt is greater than the present value of the future cash flows.

Answer 1

carrying amount of the pre-restructure debt is greater than the total future cash flows.

Question 2

On December 31, 2006, Pace Co. is in financial difficulty and cannot pay a note due that day. It is a $600,000 note with $60,000 accrued interest payable to Stevens, Inc. Stevens agrees to accept from Pace equipment that has a fair value of $290,000, an original cost of $480,000, and accumulated depreciation of $230,000. Stevens also forgives the accrued interest, extends the maturity date to December 31, 2009, reduces the face amount of the note to $250,000, and reduces the interest rate to 6%, with interest payable at the end of each year.

-Pace should recognize a gain or loss on the transfer of the equipment of

A) $0.
B) $40,000 gain.
C) $60,000 gain.
D) $190,000 loss.

Answer 2

$40,000 gain.

Question 3

On December 31, 2006, Pace Co. is in financial difficulty and cannot pay a note due that day. It is a $600,000 note with $60,000 accrued interest payable to Stevens, Inc. Stevens agrees to accept from Pace equipment that has a fair value of $290,000, an original cost of $480,000, and accumulated depreciation of $230,000. Stevens also forgives the accrued interest, extends the maturity date to December 31, 2009, reduces the face amount of the note to $250,000, and reduces the interest rate to 6%, with interest payable at the end of each year.

-Pace should record interest expense for 2009 of

A) $0.
B) $15,000.
C) $30,000.
D) $45,000.

Answer 3

$0.