Debt and Blue Company Essay

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Case Analysis: Troubled Debt Restructuring On December 31, 2014, State Bank enters into a debt restructuring agreement with Blue Company which is experiencing financial difficulties. The bank restructures a $2,000,000 note receivable by: 1. Reducing the principal obligation from $2,000,000 to $1,600,000.
2. Extending the maturity date by 3 years from 12/31/14 to 12/31/17, and 3. Reducing the interest rate from 12% to 10%. Blue Company pays interest at the end of each year. On December 31, 2017, Blue Company pays $1,600,000 in cash to State Bank. 1. What are the types of situations that result in troubled debt?

Troubled debt occurs when the debtor is in financial difficulty and unable to pay the obligation. The two types of situations that result in troubled debt is
1. Impairment
2. Restructuring through settlement or modification of terms.
A company will usually recognize a loss on impairment before restructuring its debt with the creditor.

2. What are the general rules for measuring gain or loss by both creditors and debtors in a troubled debt restructuring involving a settlement?

The debtor recognizes a gain equal to the amount of the excess. The creditor normally charges the excess loss against Allowance for Doubtful Accounts.

3. (a) In a troubled-debt situation, why might the creditor grant concessions to the debtor?
(b) What type of concessions might the creditor grant the debtor in a troubled-debt situation?
There could be economic or legal reasons that the creditor will grant concessions in the form of restructuring the debt of the debtor. The creditor would rather get some return on the money loaned as opposed to nothing. There are two types of transactions that can occur with debt restructuring: 1. Settlement of debt at a lower value than the carrying amount and 2. Continuation of debt with a modification of terms. 4. What are the general rules for measuring and recognizing gain or loss by both the creditor and the debtor in a troubled debt restructuring involving a “modification of terms”?
The creditor will always have a loss. The debtor will either record or not record a gain.
The debtor calculates the gain based on undiscounted amounts.

5. What is meant by “accounting symmetry” between the entries recorded by the debtor and creditor in a troubled debt restructuring involving modification of term? In what ways is the accounting for troubled debt restructuring non-symmetrical?
Both the creditor and debtor make journal entries using the same accounts. The difference is in the amounts that are placed in these accounts and the times that the journal entries are made. 6. Under what circumstances would a transaction be recorded as a troubled-debt restructuring by only one of the two parties to the transaction?
When the debtor modificate the terms by:
1. reduction of the stated interest rate
2. extension of the maturity date of the face amount of the debt
3. reduction of the face amount of the debt
4. reduction or deferral of any accrued interest

7. Discuss the nature of this transaction above, indicating whether any gain or loss is recognized by debtor (Blue Company). Will the gain or loss recorded by the debtor (Blue Company) be equal to the gain or loss by the creditor (State Bank)?
Modification of terms.
The total future cash flow, after restructuring of $2,080,000 ($1,600,000+480,000), exceeds the total pre-restructuring carrying amount of the debt of $2,000,000. So the debtor records no gain nor makes any adjustment to the carrying amount of the payable. 8. Prepare any 12/31/2014 journal entries that may be required by the debtor (Blue Company).
No journal entry recorded at 12/31/2014.

9. Compute the interest rate that Blue Company will use to compute interest expense in the years 2014 through 2017.
N=3, PV=2,000,000 FV=1,600,000 PMT=160,000
I= 1.428%

10. Prepare the interest payment schedule of the note for Blue Company after the debt is
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