In a TDR settlement, what types of gains are recorded?
When the debtor and creditor agree to a “settlement”, then the debtor needs to record a gain on the debt and potentially a gain on the asset exchanged. The visual below outline the two types of gain that may need to be recorded by the debtor.
For example, Fluffy Bunny Ventures entered into a troubled debt restructuring agreement with National Bank. National agreed to accept land with a carrying amount of $75,000 and a fair value of $100,000 in exchange for a note with a carrying amount of $150,000.
As you can see below, Fluffy Bunny Ventures would record a total gain of $75,000.
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What does “TDR” stand for in accounting?
“TDR” stands for troubled debt restructuring. This occurs when a debtor (borrow) either settles or modifies the terms with a creditor (lender). The timeline below helps you understand the series of events that lead to a TDR.
In a settlement, does the extinguishment result in a gain or loss for the debtor?
Generally, a settlement on extinguishment of debt will result in a gain for the debtor and a loss for the creditor. A gain occurs for the debtor because the fair value of the asset exchanged will be less than the outstanding balance on the loan (i.e. carrying value of the loan). From the creditors perspective, […]
What is troubled debt restructuring and extinguishment?
Troubled debt restructuring and extinguishment will occur when a creditor grants a concession to the debtor that would not otherwise be considered. The visual below is a recap on the terms debtor and creditor, and why the debtor and creditor would have to restructure the debt arrangement: These incidents will occur for economic or legal […]