1. Debt/Asset Ratio Equals total liabilities/total assets Measures the percentage of the capital structure provided by debt Use of debt creates financial leverage and increases risk

2. Times Interest Earned Net income + interest+taxes Interest Measures how protected creditors are with regard to interest payments, and is often a covenant in loan agreeements.

3. Accounting for Troubled Debt First recognize a loss on impairment Subsequently there may be restructurings which can results in settlements or revisions of terms

4. Impairments Loan is impaired when it is probable the creditor will not collect all the amounts due Loss on impairment is the difference between the carrying value of the loan (plus accrued interest) and the expected future cash flow from the loan discounted at the loans historical interest rate Creditor debits bad debt expense and credits allowance; debtor has no entry

5. Settlement of Debt at Less than Carrying Value Creditor will recognize loss (usually against the allowance) for the difference between the fair value of property received and the carrying value of the loan. Debtor will recognize gain/loss on property transferred and gain or restructuring of debt

6. Modification of Terms Creditor grants a lower interest rate or forgives part of loan, extends maturity date, or forgives accrued interest Creditor will reduce the carrying value of the loan to the present value of its future cash flows, using the historical interest rate. Recognize a loss for the difference between the old and new carrying values Record interest revenue subsequently using the new carrying value, with amortization going to the allowance account.

7. Debtor Accounting If total future outflows for the debtor are greater than the carrying value of the loan, no gain is recognized Need to figure the effective interest rate on the new cash flows, and amortize the loan at that rate

8. Debtor Accounting - Gain If the total future cash flows for the debtor are less than the carrying amount of the debt, a gain for the difference is recognized and the debt is written down. No subsequent interest expense will be recognized