Question

Question: What are the general rules for measuring and recognizing gain or loss by both the debtor and the creditor in a troubled-debt restructuring involving a modification of terms?

Short answer

Answer

A shift of nonmonetary assets or the issuance of the stock of debtor can be used to clear up a debt liability in a troubled debt restructuring. In these cases, the nonmonetary assets should be considered at market value.

Step-by-step solution

Meaning of troubled-debt restructuring

Troubled-debt restructuring is regarded to have taken place when a lender permits allowances that it would not generally regard, due to the economic crisis of the debtor.

General rules for measuring and recognizing gain or loss by both the debtor and creditor in a troubled debt restructuring

General rules for evaluating and identifying gain or loss by both the debtor and creditor in a troubled debt restructuring includes the debtor is needed to ascertain the excess of the book value of the payable over the market value of the assets or equity transferred, in case of gain. Similarly, the creditor is needed to ascertain the excess of the receivable over the market value of those similar assets or equity interests transferred, in case of loss. The debtor identifies a gain similar to the value of the excess and the creditor generally would charge the loss against provision for bad debt accounts. Additionally, the debtor identifies a gain or loss on disposition of assets to such range that the market value of those assets varies from their book value.