What is the journal entry to record a settlement related to troubled debt restructuring (TDR)?
There is not straightforward answer here as it depends on the type of asset that is transferred in a settlement. In addition, the journal entry would be different for the creditor and debtor.
In the example below, Silicon Bank is the creditor and Slappy Ventures is the debtor. The debtor is transferring a building to settle the loan. We’ll break down the journal entry for each party.
Silicon Bank – Silicon Bank is receiving the building, so they would record the receipt of the building at fair market value which is $80,000. They would credit the note receivable for the initial loan amount, which was $100,000. The remaining debit would be to record the loss or remove the allowance for doubtful accounts if the creditor had previously reserved for the potential loan default.
Slappy Ventures – Slappy Ventures needs to calculate the gain/loss on debt and gain/loss on the asset(s) transferred. For the debt, you would compare the FMV of the asset transferred to the loan, so $80,000 vs $100,000. Remember that the debtor will always record a gain on a settlement of debt, which would be $20,000 here. However, on the building, it had a carrying value of $110,000 and the fair market value was $80,000, so that is a loss on the transfer of the building. The other entries are to remove the note payable at face value and the carrying value of the building.
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