[Anonymous]

This question of Troubled Debt Restructuring is really troubling me. Can someone please explain me the calculation of it.

On January 1, Year 1, Gearty Corporation loans Olinto Fabrix, Inc. $200,000 with a 10% simple interest note payable in ten years. Interest on the note is payable annually and the principal is due at the end of the term. On January 1, Year 3, Olinto has yet to pay any interest and approaches Gearty in the hope of renegotiating the terms. Gearty agrees, forgives the interest on the note accrued to date, and reduces the interest to 8 percent.

The following present value amounts are available.

Present Value of $1 Present Value of an Annuity

8% 10% 8% 10%

Eight years .540 .467 5.767 5.335

Ten years .463 .386 6.710 6.145

As a result of this troubled debt restructuring, Gearty should record:

a. Bad debt expense of $64,480.

b. An extraordinary loss of $39,900.

c. A valuation allowance of $61,240.

d. An extraordinary loss of $56,100.

[M.O.D.]

Is it C?

40 (simple) interest receivable +

.467 x 200 = 93.4

5.355 x 16 = 85.360

new value of loan = 178,760

loss/expense = 200- 178.76 =21.24

Total = 21.24 + 40 = 61.240

My only concern is that Gleim's examples use bad debt expense, although this is an impairment loss.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[Anonymous]

This concerns accounting and reporting of troubled debt restructuring by creditors in regards to Modification of terms.

According to the Becker Review book

“The impairment loss is recorded by creating a valuation allowance with a corresponding bad debt expense” with a required journal entry

Dr. Bad Debt Expense

Cr. Allowance for credit losses (Valuation Allowance)

[M.O.D.]

Yes, I understand this entry now, thanks.

Better late than never…

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[Anonymous]

can someone explain why we calculate carrying value of note use 200,000+40,000=240,000. Why we do not need present value of $200,000 ? This 240,000 has the different time point with 178,760. How can these two number compare?

[Author]

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