In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows, the creditor should
A) compute a new effective-interest rate.
B) not recognize a loss.
C) calculate its loss using the historical effective rate of the loan.
D) calculate its loss using the current effective rate of the loan.

Question

Quizplus · Accepted Answer

When a creditor restructures a troubled debt and the carrying amount of the debt is less than the total future cash flows, the creditor should calculate its loss using the historical effective rate of the loan. This is because the creditor has already adjusted the carrying amount to reflect the loss at the time of the restructuring. Therefore, recognizing an additional loss would result in overstatement of the loss. The creditor should use historical effective rate because it is the most appropriate rate to use when measuring loss in a troubled debt restructuring.

In a Troubled Debt Restructuring in Which the Debt Is