Debt Restructuring

In: Business and Management

Submitted By chantelee22
Words 525
Pages 3
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 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.

The following are the journal entries required for the debt restructuring:
DR: Notes payable 3,000,000
CR: Land 1,950,000
CR: Gain from the disposal of the land 450,000
CR: Gain on early extinguishment of debt 600,000

|Year…...

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