Accounting for Troubled Debt Restructurings

[JoshO2]

How's it going everyone just wanted some thoughts on this problem:

On December 31, 2014, Federal Bank enters into a debt restructuring agreement with Carson Company which is experiencing financial difficulties. The bank restructures a $5,000,000 note receivable by:

1. Reducing the principal obligation from $5,000,000 to $4,000,000.
2. Extending the maturity date from 12/31/14 to 12/31/17, and
3. Reducing the interest rate from 12% to 6%.

Interest has been paid up to date as of 12/31/14.


Any thoughts on the nature of this transaction, indicating whether any gain or loss is recognized by either party and preparing any 12/31/14 journal entries that may be required by the debtor (Carson)? Been having trouble with this problem just wanted to see if anyone could provide some feedback? Anything at all is appreciated

 

[kirby]

You need to refigure the present value of the note using items 1,2, and 3 above. Then the difference of that amount to what's now on the books will be a loss to the Bank.

 

[Samir]

I believe that a debt forgiven is treated as income. Because that 1000000 has to go somewhere. It just can't evaporate.