Restructuring Debt Data
The company has been in financial trouble and is in the process of reorganizing. I have been asked to prepare a report regarding the restructuring of debt; specifically in regards to bonds payable, notes payable, and capital leases. This report will cover these topics and include a plan on how to restructure debt.
PART A
Bonds payable, notes payable and capital leases are types of long term liabilities. When these liabilities are issued, they are usually accompanied by some sort of restrictions or loan covenants. These loan covenants usually include" the amount authorized to be issued, interest rate, due dates, call provisions, property pledged as security, sinking fund requirements, working capital, or any other restrictions." All of this information should be included in the body of the financial statements or the notes for a complete understanding of the financial position of the company (Kieso, 2007).
Bonds payable:
When long term bond liabilities are reported, they have to be reported at their amortized value. For bonds that were issued at a premium, the total bond liability to be reported at the end of the period will be "the total par value of the bond and the premium received less issuance cost." If it was issued at a discount, the reported amount would be the total par value less unamortized discount.
Notes payable:
According to Kieso, a note is valued at the present value of its future interest and principal cash flows, which is similar to how bonds are valued. Notes payable include a maturity date and either a stated or implicit interest rate. Kieso also tells us that any premium or discount on the note should be amortized over the life of the note.
Mortgage Payable:
According to Keiso, "A mortgage note payable is a promissory note secured by a document called a mortgage that pledges title to property as security for the loan." Also, mortgages may be payable in full at maturity or in installments over the life of the loan. If the mortgage is due at maturity and the maturity date is approaching, then the mortgage liability is reported as a current liability. On the other hand, if the mortgage is paid in installments, only the installments due in the current period are reported as current liabilities.
Capital Leases:
Capital leases are debts that are incurred to attain capital assets. For a lease to be capitalized, it must meet the criteria for capital leases provided by FASB. If the lease meets this criteria, the capital is recorded as a liability along with the asset acquired and the depreciation of the asset. Similar to bonds and notes payable, a capital lease is recorded at the present value of minimum lease payments. The periodic lease payments include the interest expense as well as part of the principle of the capital lease.
Part B
Restructuring Debt:
A troubled debt restructuring occurs when a creditor “for economic or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider. (Keiso, 2007)” According to Keiso, the debtor must determine the excess of the carrying amount of the payable over the fair value of the assets or equity transferred (gain). Likewise, the creditor must determine the excess of the receivable over the fair value of those same assets or equity interests transferred (loss). The debtor recognizes a gain equal to the amount of the excess. For our company, the notes payable have not yet reached maturity and therefore these procedures must be followed. The present note has 3 years remaining and pays a current interest rate of 10%. The present market rate for a loan of this nature is 12%. The note was issued at its face value. The bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book value of $1,950,000 and a fair value of $2,400,000.
To restructure the debt, the
