...Restructuring Debt To: Finance Accounting Manager, XYZ Company Re: Restructuring Debt XYZ Company is experiencing some financial trouble and management is asking that a memo be prepared to entail important disclosures when dealing with long term debt. According to Kiesco, long-term debt consists of probable future sacrifices of economic benefits arising from present obligations that are not payable within a year or the operating cycle of the company, whichever is longer (2007, p.672). There are three types of long term debt and different requirements for reporting each debt. Per corporation’s bylaws, the company must get approval from the board of directors as well as stockholders before a note or bond can be issued. Long-term debts have covenants that are meant to protect lenders and borrowers. Long term debts have indentures or agreements that have all information about the debt. Companies disclose the features of the indenture within the body of its financial statements so that end users can have a precise understanding of the company’s financial positioning and its operations results. Bonds and Notes Payable According to Kiesco, the main purpose of bonds is to borrow for the long term when the amount of capital needed is too large for one lender to supply (2007, p. 673). Bonds allow more than one lender to partake in a company’s debt. When reporting bonds the issuing companies have to follow certain procedures that could take months to have a bond published...
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...Restructuring Debt Accounting 545 PART A Debt can be categorized into three major categories, bonds, notes payable, and capital leases. They are all forms of debt that have similarities and differences. The comparison for the current reporting for debt based on bonds, notes payable and capital leases are stated below: Bonds: Bonds are considered long-term liabilities and have a different maturity date then current liabilities. The maturity date for a bond is usually a longer period of time then that of something that is listed under the current portion of debt. A bond comes from a contract that is known to be a bond indenture. A bond represents a promise to pay, money that is given a particular maturity date based on the length of the bond, periodic interest with a specific rate on the maturity amount given. The purpose of a bond is for long-term borrowing for the amount of capital needed. Bonds can be sold at a discount interest rate with an implied rate of interest, which is within the discounted rate. Bonds can be converted into securities and can be also called in by the company. All terms and restrictions must be disclosed in the financial statements. Violations of any bond restrictions or covenants must be disclosed to the lender. In the financial statements on the balance sheet the current portion of the bond due is reported as a current liability, the remainder is reported as a long-term liability. Notes Payable: Notes Payable is money that is borrowed...
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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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...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 is a legal agreement with conditional right...
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...PART A How a debt is classified impacts the reporting requirements and hence in its presentation in the financial statements. The following compares the current reporting for debt and each type of bonds. • Long term bond liabilities – reported at amortized value. If a bond was issued at a premium, the total bond liability reported by the issuer is equal to the par value plus the unamortized premium. Par value of bond liability ± Unamortized premium (discount) • Capital leases are included in the company’s liabilities while operating leases are not. Capital leases are recorded at the present value of the periodic lease payment discounted at the lessee’s cost of capital less the cumulative principal component of the periodic lease payment. • Mortgage payable are reported not unlike that of the reporting requirement for bonds and capital leases liabilities. The present value of the periodic payments is computed at the discount rate adjusted for the principal payment component of the periodic mortgage payment. • Pension liability. It is that a minimum liability related to employee pension plan be reported if at the balance sheet date the accumulated benefit obligation or ABO exceeds the fair value of the plan assets. The ABO estimates the present value of benefits already earned by the company’s employees without considering future salary benefits. • Debt restructuring. Given substantive modification of any of the terms of the existing debt or a purchase or...
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...Restructuring of Debt Data | Long-term debt consists of probable future sacrifices of economic benefits arising from present obligations that are not payable within a year or the operating cycle of the company, whichever is longer. Long term debt is a way to finance and gain capital when the company cash flow is minimal. To name a few types of long term debt: bonds payable, notes payable, mortgages payable, pension liabilities, and lease liabilities. This assignment will define basic terms such as long-term debt, bonds, mortgage, and capital leases. In addition answer questions in reference to the ABC Company journal entries, postretirement and note disclosure. A bond arises from a contract known as a bond indenture. A bond is a form of a long term promissory note that is regulated under the federal securities law or state laws. Typically, a bond represents a promise to pay. Bonds are a unique way to raise capital for organizational needs. Bonds are accounted for in a similar to notes payable with the exception that bonds are normally issued to different lenders. These lenders, also known as investors, may sell their bonds to another investor prior to their maturity. There are several types of bonds, however, the more common forms of bonds are secured and unsecured bonds. Secured bonds are backed by the borrower’s collateral, thus meaning no tangible property or any other kind of product is attached to that debt. A well-known example of a secured bond is a...
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...ABC Company is in financial trouble and management has decided that reorganization is in order. The company’s debts need to be decreased using available assets. The bank has agreed to relinquish claim on notes outstanding in exchange for fixed assets. Currently, the company’s total liabilities exceed the total assets. Long-term debt consists of “probable future sacrifices of economic benefits arising from present obligations that are not payable within a year or the operating cycle of the company, whichever is longer” (Kieso, Weygandt, & Warfield, 2007). The company’s long-term liabilities consist of capital lease obligation, note outstanding, mortgage outstanding and other liabilities; the largest of which is the notes payable. The company’s fixed assets are land, buildings, equipment, and other leasehold improvements. The bank has agreed to accept land which has a book value of $1,950,000 and a fair value of $2,400,000 as payment for the note outstanding of $3,000,000. The following are the journal entries for restructuring of long-term debt: Land 2,400,000 Discount on Notes Payable 600,000 Notes Payable 3,000,000 Notes Receivables 1,950,000 Discount on Notes Rec. 550,000 Sales 2,400,000 This exchange will leave the company with total long-term liabilities of $758,470. The company is also considering switching its post-employment benefits from a defined benefits plan to a defined contribution plan. In a defined contribution...
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...payment. Mortgage payables are reported in the financial statements in the same way that as bonds and capital leases liabilities. The present value of the periodic payments is computed at the discount rate and decreased by the principal payment component of the periodic mortgage payment each period. It is required that a company reports a minimum liability related to its employee pension plan if and only if the accumulated benefit obligation or ABO exceeds the fair value of the plan assets. In debt restructuring, if there is a substantive modification of any of the terms of the existing debt or a purchase or other settlement of an existing debt through repayment or replacement, then the debtor needs to account for a gain or loss on the debt restructuring. In the company’s case, the debt was settled earlier than it original maturity date, hence there was a substantive modification of terms. The following are the journal entries required for the company’s current debt restructuring: DR: Notes payable 3,000,000 CR: Land 1,950,000 CR: Gain from the...
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...What does the doctrine of adverse possession provide? In its most basic sense, “adverse possession” is a legal doctrine that allows a person to acquire legal ownership of property that he treats as his own, if he does so for a long enough period of time, even though the property is not his own. In other words, a person who uses another person’s property, without permission, for a long enough period of time, can acquire legal ownership of that property. What elements need to be proven? 1. The statutory period of time of possession. In most states, this period is between 10 and 20 years. 2. Open, visible, and notorious. The adverse processor must physically occupy the property so as to put the owner on notice of the possession. 3. Actual and exclusive - the property must be occupied by the adverse possessor. The planting of crops, grazing of animals, or building of a structure on the land constitutes physical occupancy. 4. Continuous and peaceful. The property cannot be taken by force from the owner and the statutory period of time of possession must be continuous. 5. Hostile and adverse. The property must be occupied by the possessor without expressed or implied permission of the owner. Did the Witts act ethically in claiming title to someone else’s land? Team C had differing opinions regarding whether the Witts actions were ethical or not. The group agreed that the Witts proved adverse possession under the state law and should be allowed to retain the property...
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...focusing on restructuring and how it relates to cost improvement. This information has been investigated in order to gain a good knowledge on the importance of restructuring. In order to test this theory, I used random sampling of 20 different data reports relate to the issues that the company faces concerning expenditures, labor and necessary spending. Each month every section of the company has a major meeting and part of the meeting is to discuss the financial reports of the company. Many companies may not find this to be important but it is necessary for our company to do this to track spending. Companies typically do not discuss financials with everyone but they do with us because everyone is given a credit card and a budget for their particular section. We are able to access the other part of company’s financial documents if we want to use them as a tool to improve our budgets. What prompted me to do this is I started working for the company in the year of 2011. After working 5 months for the company, the employees received a letter stating that there will be pay cuts due to the government cutting funding for the program that we are in. There were many complaints from employees who have been there for many years. The employees complained stating that they were told the last pay cut they received would be the final pay cut. I was able to speak to some people in the office and found that they didn’t receive any pay cuts. The company should make the necessary restructuring if they...
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...Organizational Downsizing Techniques and Handling Layoffs Team 1 Christina Berardi Bridget Quinn-Carey Tung-Yueh, Lee Over the last two decades, organizational downsizing has been a key management strategy favored by many organizations attempting to cope with fundamental and structural changes in the shifting economy. In the mid-1980’s, downsizing was implemented primarily by companies experiencing difficult economic times (Gandolfi, 2006). Companies hoped to cut costs and improve performance. By the late-1980’s, it developed into a proactive restructuring strategy for a multitude of organizations. Furthermore, since then, organizational downsizing has now transformed the corporate landscape and changed the lives of hundreds of millions of individuals around the world (Gandolfi, 2006). There are several definitions that have been developed to effectively define the phenomenon of organizational downsizing. To sum it up in one sentence, organizational downsizing refers to a set of activities, taken on by the core management of an organization, designed to improve organizational efficiency, productivity, and competitiveness. It represents a management strategy that affects three components: (a) the size of the firm’s workforce, (b) the costs, and (c) the work processes. On the surface, downsizing can be interpreted as merely a reduction in organizational size, and the process is a chaotic and uncertain experience...
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...Part A: Long-term debt can generally be classified into three different categories: bonds payable, notes payable, and capital leases. Bonds payable can be secured by collateral, such as a mortgage bond, or unsecured, backed only by a company’s promise to pay. Most bonds carry a stated rate of interest but others are sold at a discount with an implied rate of interest inherent in the discounted sale. Some bonds can be converted into other securities. Other bonds can be called in by the corporation. All of the terms and features must be disclosed in the financial statements. Any restrictions or covenants must also be disclosed. These restrictions are placed on the issuing corporation to protect the bondholder. Restrictions may include inability to pay bonuses or dividends, purchase additional capital assets, a requirement for bond sinking funds, or maintaining specified levels of working capital or debt ratios. Any violations of bond restrictions or covenants must be disclosed. Bonds are reported at face value less unamortized discount or plus unamortized premium. The current portion (due within a year) is reported as a current liability, the remainder is reported as a long-term liability. Notes payable are sums of money borrowed by a company that are evidenced by a promissory note. Notes payable have a specified maturity date and generally have a specified interest rate. Notes payable that do not have a specified interest rate are issued at a discount and the interest component...
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...Introduction Since 1908, General Motors (GM) is primarily engaged in automotive production and marketing and financing and insurance operations. GM designs, manufactures, and markets vehicles worldwide, having its largest operating presence in North America. By 2008, GM became vulnerable to the auto industry crisis, which they were not able to meet obligations. Over the years, GM was a dominating force in the auto industry. However, rising labor costs, concessions made to the unions, higher gas prices and a recession, GM was heavily burdened and could not provide the sufficient marketing funds for any one of its product lines. The U.S. government agreed to lend $13 billion in order to buy time to develop a restructuring plan (DePamphilis, 2012, p.648). The restructure plan impacted employees and operations in U.S. and Canada. With mergers and acquisition activities, the intent is to preserve and provide jobs to the community. However, this was not the case with GM. Was it justified to reduce the workforce? Therefore, the review of the bankruptcy steps taken by GM will determine if the restructure was successful. Pension Plan General Motors pension fund obligations and health care obligations appear to threaten the future of the company. Majority of General Motors’ U.S. employees are members of the United Auto Worker (UAW) Union, which ensures health insurance for its members by entering into contractual agreements with employers. In the 1990’s the UAWs’ officers...
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...How To Make Restructuring Work for Your Company Published: | October 1, 2001 | Author: | Stuart C. Gilson | Executive Summary: A bungled corporate restructuring can turn a good idea into disaster. In an excerpt from his new book, HBS professor Stuart Gilson outlines the keys for a successful corporate makeover. Plus: Gilson Q&A. About Faculty in this Article: Stuart Gilson is the Steven R. Fenster Professor of Business Administration at Harvard Business School. * More Working Knowledge from Stuart C. Gilson * Stuart C. Gilson - Faculty Research Page Editor's Note: The following excerpt is taken from the "Lessons of Restructuring" section of Gilson's introduction to Creating Value through Corporate Restructuring. Although the case studies in this book span a wide range of companies, industries, and contexts, some common issues and themes emerge. Taken together, they suggest there are three critical hurdles or challenges that management faces in any restructuring program: 1. Design. What type of restructuring is appropriate for dealing with the specific challenge, problem, or opportunity that the company faces? 2. Execution. How should the restructuring process be managed and the many barriers to restructuring overcome so that as much value is created as possible? 3. Marketing. How should the restructuring be explained and portrayed to investors so that value created inside the company is fully credited to its stock price? Failure to address any one of...
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...Bankruptcy filing of Kodak Whenever a big corporation files for bankruptcy, many investors question the move. After the recession, many big corporations like Lehman Brothers etc filed Chapter 11. A chapter 11 case starts when the company voluntarily files for a petition in bankruptcy court. When the company has many outstanding, it prefers to file for the case. It was no big surprise when Eastman Kodak, 131 year old company that was founded by George Eastman filed for bankruptcy protection in 2012 under chapter 11 of US bankruptcy code in Southern District of New York. It was pioneer in introducing first automatic snapshot camera. It was the first company that provided the individuals a solution for taking their own photographs and not depends on professionals. The term ‘Kodak Moment’ became synonymous with taking pictures of precious moments and having pictures of life time of memories. Reasons for Bankruptcy An attempt is made to understand what lead to the financial distress in the company. The top management of Kodak could never innovate. Though they were pioneers in launching the concept of self photography, many competitors developed better products and took the market share from the company. The company thought that its customers would remain loyal to it but when new products and new technology was offered in the market, it lost its market. The company did not pay attention to the improvement in the technology. When digital cameras came into existence, Kodak did...
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