A debtor and a creditor have negotiated new terms on a note. How can you determine whether the restructuring is a troubled debt restructure?
A) If the interest rate as stated in the restructuring agreement has been reduced relative to the original loan agreement
B) If the present value of the restructured flows using the original interest rate is less than the market value of the original debt at the date of the restructure
C) If the present value of the restructured flows using the original interest rate is less than the book value of the debt at the date of the restructure
D) If the interest rate that equates (1) the book value of the debt at the date of the restructure and (2) the present value of restructured cash flows, exceeds the original interest rate

Question

Quizplus · Accepted Answer

A troubled debt restructuring occurs when the present value of the restructured cash flows, discounted at the original interest rate, is less than the book value of the debt at the date of the restructure. This indicates that the creditor has granted a concession to the debtor.

A Debtor and a Creditor Have Negotiated New Terms on a Note