...Part A Company A is in financial trouble. The company is reorganizing its processes and is looking to restructure its debt. Debt restructure is a mutual agreement between a financially troubled company and this company’s creditor, the bank. This process will reorganize the liabilities to prevent foreclosure or even asset liquidation (Business Dictionary, 2012). The liabilities under consideration for Company A are its capital lease obligations, notes outstanding liability, and mortgage outstanding. Company A’s capital lease obligations are currently $54,580. A capital lease is fixed-term lease similar to a loan agreement to the extent of purchasing capital assets with installment payment plans. The current capital lease obligation will not need restructuring but will require regular payments. The notes outstanding are for $3 million is of great concern to the company. The bank has offered to accept land with a book value of $1,950,000 and fair value of $2,400,000. By restructuring this debt, Company A will be able to concentrate on paying off its other current and long-term debts. The journal entries should this restructure occur are: Land (2,400,000 – 1,950,000) 450,000 Gain on disposition of assets (ordinary) 450,000 Note Payable 3,000,000 Land (fair value) 2,400,000 Gains on troubled debt restructure (extraordinary) 600,000 The mortgage outstanding is for $608,030 and will not require restructuring to settle this amount. A mortgage...
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...had a policy of paying for its acquisitions either entirely in cash or borrowing funds with early repayment. Continuing to grow, the company became publicly-owned when it issued its first 250,000 shares of stock in 1947. After its first IPO, Stone was able to widen its reach demographically. The company began acquiring even more to better diversify itself in the paper industry. By 1987 Stone had quintupled its production capacity but had borrowed heavily to do so. Stone Forest Industries, a subsidiary of Stone Container, was created to relieve some of this debt and Stone Container was able to diminish the rest. In 1989, Stone was back at it when it acquired Consolidated-Bathurst Inc in conjunction with its $3.3 billion of debt. Even with its high standing in the industry, in 1993 Stone Containers future was a shaking one; one that came down to how it would avoid defaulting on its $4.1 billion of debt. II. Condition of the Industry Summary of the Paper & Forest Products industry: * Industry Niches and relevant competitive leaders: * Paper and Wood- Georgia Pacific * Sanitary Tissue Products- Scott * Softwood Timber- Weyerhaeuser * Containerboard/Corrugated Containers- Stone Container Corporation * Industry Sales Growth- 38% revenue growth between the years of 1986 and 1992. * 1986 Revenue- $61.6 billion * 1992 Revenue- $85.2 billion * Industry Net Profit - Declined by 65% between the years of...
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...TROUBLED PAST AND PRESENT During the fiscal year of 2002, United Airlines faced tremendous pressure from increase in costs, and decline in passengers. United Airlines was in a difficult position to pay off its debt, given that its industry leverage ratios are high compared to other industries. After failure to attain $ 1.8 million in loan guarantees from the Air Transport Stabilization Board, UAL finally filed for bankruptcy protection in December the same year. ANAYLSIS OF UAL UNDER BANKRUPTCY PROTECTION The rationale for allowing companies to restructure their debt and operation is to allow companies to have the ability to cut its and raise some much needed cash to continue its operation. “Automatic stay”, under section 1110, which is a specific code in the airline industry, helps to protect creditors whose loans are secured by aircraft. However, “automatic stay” also guarantees a secured loan period of up to 60 days, in which debtors are not obliged to pay back creditors. Once companies like UAL filed for bankruptcy protection, it is virtually impossible for these companies to attract willing creditors to finance these companies. Thus, under the Chapter 11 protection, it allows debt-in-possession (DIP) financing to help these companies to raise needed capital. DIP loan are guaranteed seniority to existing creditors, which are incentives to creditors to provide funds to companies under bankruptcy protection. From the perspective of UAL, attracting more creditors to...
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...clients on their debt management and structure and is a demonstration of how active debt management can affect a firm’s performance. The case examines Union Carbide Corporations approach to debt management and shows the relationship between financial practices, banking relationships and the necessity for banks to understand their client’s current situation and needs. At the time of the case Union Carbide had transformed from a Fortune 500 company with $9.1 billion in revenues in 1983 with a low debt level of 39% to a highly leveraged firm with a debt to equity ratio of 72% (a 33% increase) by mid 1986. This increase of debt stemmed from a highly publicized and disastrous gas leak at a Carbide plant in Bhopal, India in 1984. “The event rocked the company and dramatically affected its financial condition” (p. 2). Eight months after the gas leak, in August 1985, Union Carbide found itself to be an attractive takeover target. As part of its takeover defense in 1986 Union Carbide increased their debt levels and terminated jobs while closing plants and selling off businesses. The results of this restructure left Union Carbide with medium and long fixed rate debt of $2.5 billion and a weighted average interest rate of 14.2% which calculates to roughly $355 million interest paid yearly. This high interest rate was a consequence of a downgrade in Union Carbides debt rating and that left Union Carbide with a need to restructure its debt. Who and how would this debt be restructured...
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...generous deal to a cash strapped New York Times. With a $400M debt facility looming in May, the New York Times has been exploring various positions to increase or bolster its cash reserves to either restructure or refinance the debt facility. The offer from Carlos Slim was for $250M in cash, repayable at 14% annual interest rate coupon, and an attached warrant that would allow him to exercise a buyout of 16 million shares of stock. The question comes down to whether this was a calculated, debt based investment of Carlos Slim’s money, or whether he has other motives for providing the media company the money, which is part of an industry currently struggling. The first thing that must be stated is that Carlos Slim already has an investment of 6.9% in NYT stock, a deal that had lost 50% of its value already. If he exercised his warrants for class “A” shares of New York Times stock, it would give him nearly 17% of currently available stock. This stock would be different than the class “B” stock, which has a majority share by the current New York Times owners, the Sulzberger family. (Kafka, 2009) However, he would still be the second largest shareholder in the company. This puts a spin on the “bailout” Carlos is offering. He could be attempting to boost his own shares for a selloff. He could be attempting to lower the value of NYT to buy more ownership of the company. He could also be attempting to profit from a debt investment opportunity with a steep interest rate. Could...
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...Does the Restructuring of Resort Co.’s Original Debt represent a troubled debt restructuring? The restructuring of the debt should be accounted for as a troubled debt restructuring based on the following: To determine if troubled debt restructuring applies, both of the following conditions must be present: 1. The company must be experiencing financial difficulty 2. Creditor must grant concessions ASC 470-60-55-8 provides relevant implementation guidance in determining whether or not debtor is experiencing financial difficulties. 55-8 All of the following factors are indicators that the debtor is experiencing financial difficulties: a. The debtor is currently in default on any of its debt. b. The debtor has declared or is in the process of declaring bankruptcy. c. There is significant doubt as to whether the debtor will continue to be a going concern. d. Currently, the debtor has securities that have been delisted, are in the process of being delisted, or are under the threat of being delisted from an exchange e. Based on estimates and projections that only encompass the current business capabilities, the debtor forecasts that its entity-specific cash flows will be insufficient to service the debt (both interest and principal) in accordance with the contractual terms of the existing agreement through maturity. f. Absent the current modification, the debtor cannot obtain funds from the sources other than the existing creditors at an effective interest rate equal to...
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...pizzas and an assortment of “grab and go” sandwiches and salads. In 2000, CPK launched company owned ASAP locations as well. In 2007, CPK ceased development for any future ASAP locations to focus more on continued expansion of both domestic and international franchised locations. With the recent 10% share price decline, CPK is questioning whether this is an ideal time to repurchase shares and potentially leverage the company’s balance sheet with its prevailing line of credit. CPK is considering repurchasing shares and using debt financing to fund the strong expansion outlined for the company. In 2000 when CPK went public, it used the proceeds to pay off its outstanding debt and avoided debt financing. Analysis Questions: 1. To improve the company’s performance they would need to restructure their working capital policy and make use of the available leverage. CPK can use debt to repurchase stock and continue to grow and increase profits. Utilizing the debt would also reduce the tax...
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...DEBT COUNCELLING (YDDC) Terms and Conditions Terms and Conditions * The Client refers to the person entering into the agreement. * The creditors refers to the company which is the client is enterin into an agreement with. * Fees means refers to the amount to be paid by the Client to the Company in accordance with agreement. * The services refers to the service to be provided by the Company to the Client in accordance with the agreement. * The repayment plan means the schedule of payments to the creditors as prepared by the Company in accordance with the agreement. Agreement * The Client hereby enters into an agreement to appoints the Company to provide the services of debt counselor and further authorizes the Company to negotiate with the Clients Creditors with a view to agreeing with them a solution to any outstanding financial issues which may include amongst others, a comprehensive repayment schedule and money management and disbursement plan The Company * The company will communicate on behalf of the client with all Credit Bureaus and Creditors that you have come under debt review with Debt Therapy in accordance with the National Credit Act. * Once we, The Company, receive all the information, we will access the details of the Clients income, outgoings, assets, liabilities, creditors and related credit agreements, as a provided to the Company by the Client in accordance with the agreement and determine the Client assets and liabilities and...
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...Over the decades the USA’S national debt has risen to over $17 trillion, very close to defaulting, yet many countries are still keen to lend. Why do you think this is? Do you think this level is sustainable? Since the time of the Founding Fathers US leaders have believed in the concept of American exceptionalism, that the US is a special country with a special mission. It is a notion that continues to this day and when it comes to the threat that it’s deteriorating national finances present to the world economy the US is truly exceptional. We have seen a debt crisis grip Europe and worries mount over the financial state of Japan. These problems are scary enough but when it comes to terrifying debt crisis scenarios, the US stands in a universe all of its own. It is not because the US debt burden is the biggest, but because of the exceptional role the US plays in the global economy. US debt runs the risk of crashing the entire operating systems of the global economy. Not only is the US the world’s largest economy but it also dominates the global monetary system. In many respects, the entire architecture of global finance is built upon the US economy. The US dollar is very dominant in global financial affairs, more than 61% of financial reserves are held in dollars, 85% of foreign exchange transactions are conducted in dollars and 45% of all debt securities are dollar denominated. To reduce the dollars use in international trade and business, something else would have...
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...11 4, 5, 6, 7, 8, 9, 10, 11, 13, 14, 15 12, 13, 14, 15 16, 17, 18 19 1, 2, 3, 4, 5, 6, 7, 10 1, 2, 3, 4, 5, 6, 7, 10, 11 2, 4, 5, 6, 7, 10 8, 9 10 1, 3, 6 3. 1, 2, 3, 4 4. 5. 6. Retirement and refunding of debt. Imputation of interest on notes. Disclosures of long-term obligations. Troubled debt restructuring. 12, 13 14, 15, 16, 17, 18 19, 20, 21, 22, 23, 24 27, 28, 29, 30, 31, 32 11 12, 13, 14, 15 9 3, 4, 5 1, 3, 5 *7. 20, 21, 22, 23, 24, 25, 26 13, 14, 15 *This material is discussed in the Appendix to the Chapter. Copyright © 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 14-1 ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE) Learning Objectives 1. 2. Describe the formal procedures associated with issuing long-term debt. Identify various types of bond issues. 1, 2 Brief Exercises Exercises Problems 3. Describe the accounting valuation for bonds at date of issuance. Apply the methods of bond discount and premium amortization. Describe the accounting for the extinguishment of debt. Explain the accounting for long-term notes payable. Explain the reporting of off-balance sheet financing arrangements. Indicate how to present and analyze long-term debt. Describe the accounting for debt restructuring. 1, 2, 3, 4, 5, 6, 7, 8 2, 3, 4, 5, 6, 7, 8, 10 11 12, 13, 14, 15 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15 3, 4, 5, 6, 7, 8, 9, 10, 12, 13, 14, 15 12, 13,...
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...crisis has brought Beximco Ltd, the largest company of Beximco Group, on the verge of collapse. So says Salman F Rahman, vice chairman of the group, in a letter to the central bank governor early this month. “Beximco Ltd is facing an extreme liquidity crisis and is on the verge of closing down,” Salman said in the letter. He blamed the situation on two factors -- politically motivated credit restrictions on the group between 2001 and 2008 and repayment of Tk 800 crore in bank loans in the last three years. The group is beset by huge loans worth Tk 5,245 crore to seven banks and requires urgent restructure of its debt to survive, the letter said. Beximco Ltd owes Tk 4,315 crore to four state-owned banks -- Sonali, Janata, Agrani and Rupali -- and the rest Tk 930 crore to three private banks -- AB, Exim and National. The group also came up with a restructuring plan of all its debt. It wants to reschedule the loans up to 2026 with a moratorium period for 2.5 years. The group wants to pay only 10 percent interest against these loans, much lower than the market rates of 13-14 percent. Beximco Ltd (Bangladesh Export Import Company Limited) operates in multiple industrial areas, including textiles, real estate, hospitality, marine food, commodities trading, ICT, ceramics and aviation. The company's largest division is Beximco Textiles, which was amalgamated with Beximco Ltd in 2011. The company's paid-up capital is Tk 601 crore and the public own more than 65 percent stakes...
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...Restructuring Debt 1 Restructuring Restructuring Debt 2 The three common long term debt options are bonds, notes, and capital leases. These three financing options provide companies with needed resources when looking to finance business opportunities or restructure debt, the company must decide which options if not all are right for their business and restructuring of debt. Bonds, Notes, and Capital Leases Bonds are certificates issued to companies who promise to pay back borrowed money with a fixed interest rate at a certain time or maturity date. The borrower pays the interest or coupon on the bond either annually, semi- annually, or monthly. Bonds that mature in less than a year is called a boll, bonds that mature between one and Ten years are called notes, under writers provide the bond financing and then sell the bonds off to investors for profit on the open market. There are different types of bonds like callable bonds that allow the borrower to pay the bond off before maturity to limit interest paid on the bond. Putable bonds allow the bond holder to demand payment on the principle at an earlier date than specified avoiding coupon payments in the future. Convertible bonds are used by publically traded companies, this allows the principle to be “paid in shares of the company instead of cash” (Money, 2011). Corporate paper are short –term bonds issued to finance business operations. Bonds are used for financing activities for...
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...reindustrialization. The central bank started rebuilding its dollar reserves. * The currency exchange issue was complicated by two mutually opposing factors: a sharp increase in imports since 2004 (which raised the demand for dollars), and the return of foreign investment (which brought fresh currency from abroad) after the successful restructuring of about three quarters of the external debt. The government set up controls and restrictions aimed at keeping short-term speculative investment from destabilizing financial markets. * By 2002 GDP growth had returned, surprising economists and the business media, and the economy began to grow at an average 9% per year. In 2005, Argentina’s GDP exceeded pre-crisis level. * Instead Nestor Kirchner inaugurated a series of emergency public works programs. He authorized payments to unemployed workers (150 pesos per month) to meet the basic needs of nearly half the labor force. * Against this background of total and unmitigated failure and the human disaster of US – IMF promoted “free-market” policies, Kirchner/Fernandez defaulted on the external debt, re-nationalized several privatized firms and the pension funds, intervened the banks and doubled social spending, expanded public...
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...people who can no longer pay their creditors get a fresh start by liquidating assets to pay their debts or by creating a repayment plan. Bankruptcy laws also protect troubled businesses and provide for orderly distributions to business creditors through reorganization or liquidation. Most cases are filed under the three main chapters of the bankruptcy code. They are Chapter 7, Chapter 11, and Chapter 13. Federal courts have exclusive jurisdiction over bankruptcy cases. This means that a bankruptcy case cannot be filed in a state court. Below is a high-level summary on each bankruptcy code: Chapter 7 – Liquidation under the bankruptcy code: The chapter of the Bankruptcy Code providing for "liquidation," ( i.e., the sale of a debtor's nonexempt property and the distribution of the proceeds to creditors.) Chapter 11 - Reorganization under the bankruptcy code: The chapter of the Bankruptcy Code providing (generally) for reorganization, usually involving a corporation or partnership. (A chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time. People in business or individuals can also seek relief in chapter 11.) Chapter 13 – Individual debt adjustment: The chapter of the Bankruptcy Code providing for adjustment of debts of an individual with regular income. (Chapter 13 allows a debtor to keep property and pay debts over time, usually three to five years.) To some extent, Chapters 11 and 13 are similar. Both...
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...On March 31, 2010, at the end of its first quarter, Company A owned a portfolio of investment-grade, fixed-rate debt securities classified as available for sale. Because of interest rate increases that occurred between the date that certain securities were acquired and March 31, 2010, a material portion of the portfolio was “underwater.” Company A evaluated this decline in fair value to determine whether it is other than temporary and concluded that the decline is temporary. Company A provided the auditors with a brief memo documenting its conclusion as of the period end as follows: M EM O R AN D U M TO: FROM: DATE: SUBJECT: Company A Files Controller March 31, 2010 Assessment of Impairment As of March 31, 2010, management has reviewed the investment portfolio and has identified the following investments with a fair value below amortized cost: Investment Municipal bonds Corporate bonds Acquisition Date 9/30/08 7/30/07 Amortized Cost $8,500,000 $8,200,000 Fair Value $7,500,000 $6,800,000 Unrealized (Loss) ($1,000,000) ($1,400,000) Duration of Impairment 18 months 32 months We have determined that the debt securities are not other-than-temporarily impaired on the basis of the following facts: • • • • We do not intend to sell the debt securities as of March 31, 2010. We have determined that it is not more likely than not that we will be required to sell the debt securities before recovery of their amortized cost bases. The decline is attributable solely to adverse interest...
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