A company modifies the terms of its debt. The modification is treated as a 'troubled debt restructuring' involving only a modification of terms (no asset transfer). The total future cash payments (undiscounted) under the new terms are LESS than the carrying amount of the debt. How should the debtor account for this?

Compare Carrying Amount vs. Total Future Cash Flows (Undiscounted). If CF If CF > CV: No Gain. New effective interest rate calculated.

Area II: Balance Sheet Accounts — CPA Practice Question 32

How to approach this question

Compare Carrying Amount vs. Total Future Cash Flows (Undiscounted). <br/>If CF < CV: Gain = CV - CF. New CV = CF. Interest Exp = 0. <br/>If CF > CV: No Gain. New effective interest rate calculated.

Full Answer

B.Reduce the carrying amount to the total future cash payments and recognize a gain✓ Correct

In a Troubled Debt Restructuring (modification of terms), if the undiscounted total future cash payments are less than the carrying amount of the debt, the debtor must write down the debt to the total future cash payments amount and recognize a gain for the difference. No interest expense is recognized in the future.

Common mistakes

Confusing the two TDR scenarios (Gain vs No Gain).

How to approach this question

Full Answer

Common mistakes

Practice the full CPA FAR Practice Exam 3

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