What is Accounting For Troubled Debt Restructuring?

Accounting For Troubled Debt Restructuring

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Accounting For Troubled Debt Restructuring

Accounting for Troubled Debt Restructuring (TDR) involves the recognition and measurement of the effects of concessions given by creditors in situations where the debtor is experiencing financial difficulties. Both the debtor and creditor need to account for these restructurings in their financial statements.

Here’s an overview of how TDR is accounted for:

1. Accounting by the Creditor:

2. Accounting by the Debtor:

Example of Accounting For Troubled Debt Restructuring

Let’s delve into a detailed example for the accounting treatment of a Troubled Debt Restructuring (TDR).

Scenario:

TechStart Inc.” took a $500,000 loan from “SafeBank” with an annual interest rate of 8%. Due to market downturns, TechStart Inc. struggles to make repayments. Recognizing the company’s financial distress, SafeBank offers to restructure the loan.

Restructured Terms:

  • Reduction of principal amount from $500,000 to $450,000.
  • Reduction in the annual interest rate from 8% to 6%.
  • Extension of the loan’s term by 2 years.

Accounting by SafeBank (Creditor):

Accounting by TechStart Inc. (Debtor):

  • Gain on Restructuring:
    • Gain = Carrying amount of the loan – Present value of restructured cash flows
    • Gain = $500,000 – $420,000 = $80,000
    • TechStart Inc. will recognize a gain of $80,000, reducing its liability to $420,000.
  • Future Interest Expense:
    • Interest expense is now recognized on the reduced liability amount ($420,000) using the original effective interest rate of 8%.

Journal Entries:

For SafeBank:

  • To record the impairment:
  Loss due to Impairment       $80,000
      Loan Receivable                $80,000

For TechStart Inc.:

  • To record the gain from restructuring:
  Loan Payable               $80,000
      Gain on Restructuring       $80,000

This example simplifies the accounting process, but it provides a framework to understand the basic entries and calculations involved. As always, the exact procedures might vary based on specific restructuring terms and applicable accounting standards.

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