What is Troubled debt restructuring (debtor)?
In short
A troubled debt restructuring occurs when a creditor grants a concession to a debtor in financial difficulty. If the debt is settled with assets or equity, the debtor recognizes a gain equal to the debt's carrying amount minus the fair value given.
Key takeaways
- If terms are modified and total future cash payments are less than the carrying amount, the debtor reduces the debt to that total and recognizes a gain; no interest expense is recognized afterward.
- If future payments exceed the carrying amount, no gain is recognized and a new, lower interest rate applies.
- Creditors no longer use special troubled debt accounting; they follow the expected credit loss model.
Where it's tested
FAR: Long-Term Debt (Bonds & Notes) — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
In a troubled debt restructuring, a debtor transfers land with a carrying amount of $300,000 and fair value of $350,000 to fully settle debt with a carrying amount of $500,000. What gain on restructuring of debt does the debtor recognize?