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Restructuring Debt

In: Business and Management

Submitted By motherof3
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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 plan, the employer agrees to contribute to a pension trust a certain sum each period, based on a formula which, in this instance is 3% of payroll (Kieso, Weygandt, & Warfield, 2007). A defined benefits plan outlines the benefits that employees will receive when they retire. These benefits typically are a function of an employee’s years of service and of the compensation level in the

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