Solutions-1 - Q14*27 Two different types of situations result with troubled debt(1 Impairments and(2 Restructurings Restructurings can be further

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Q14-*27. Two different types of situations result with troubled debt: (1) Impairments, and (2) Restructurings. Restructurings can be further classified into: (a) Settlements. (b) Modification of terms. When a debtor company runs into financial difficulty, creditors may recognize an impairment on a loan extended to that company. Subsequently, the creditor may modify the terms of the loan, or settles it on terms unfavorable to the creditor. In unusual cases, the creditor forces the debtor into bankruptcy in order to ensure the highest possible collection on the loan. Q14-*29. (a) The creditor will grant concessions in a troubled debt situation because it appears to be the more likely way to maximize recovery of the investment. (b) The creditor might grant any one or a combination of the following concessions: 1. Reduce the face amount of the debt. 2. Accept noncash assets or equity interests in lieu of cash in settlement. 3. Reduce the stated interest rate. 4. Extend the maturity date of the face amount of the debt. 5. Reduce or defer any accrued interest. Q14- *30. When a loan is restructured, the creditor should calculate the loss due to restructuring by sub-tracting the present value of the restructured cash flows (using the historical effective rate) from the carrying value of the loan. Interest revenue is calculated at the original effective rate applied towards the new carrying value. The debtor will record a gain only if the undiscounted restructured cash flows are less than the carrying value of
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This note was uploaded on 01/31/2011 for the course MGMT 351 taught by Professor Staff during the Spring '08 term at Purdue University-West Lafayette.

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Solutions-1 - Q14*27 Two different types of situations result with troubled debt(1 Impairments and(2 Restructurings Restructurings can be further

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