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    Restructuring Debt using the settlement of debt method

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    Individual Assignment: Restructuring Debt

    Your company is in financial trouble and is in the process of reorganization. Your manager wants to know how you will report on restructuring the debt. Use the following information to help with this assignment.

    Part A

    ASSETS
    CURRENT ASSETS
    Cash and cash equivalents $ 108,340
    Trade accounts receivable, net of allowances 2,866,260
    Other receivables 62,150
    Operating supplies, at lower of average
    cost or market 58,630
    Prepaid expenses 446,050

    Total Current Assets 3,541,430

    PROPERTY, PLANT AND EQUIPMENT (at cost)
    Land 1,950,000
    Buildings and improvements 2,327,410
    Equipment 5,015,660
    Other equipment and leasehold improvements 1,645,580
    total 10,938,650
    Accumulated depreciation and amortization (7,644,430)
    Net Property, Plant, and Equipment 3,294,220
    OTHER ASSETS
    Deposits and other assets 1,000,080

    TOTAL ASSETS $ 7,835,730

    LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

    CURRENT LIABILITIES
    Accounts payable $ 972,160
    Accrued liabilities 2,071,270
    Accrued claims costs 793,620
    Federal and other income taxes 19,710
    Deferred income taxes 500
    Current maturities of long-term debt and
    capital lease obligations 50,610
    Short-term borrowings 249,250
    Total Current Liabilities 4,157,120

    LONG-TERM LIABILITIES
    Capital lease obligation 54,580
    Note Outstanding 3,000,000
    Mortgage Outstanding 608,030
    Other liabilities 95,860
    Total Long-term Liabilities 3,758,470

    Total Liabilities 7,915,590

    SHAREHOLDERS' EQUITY (DEFICIT)
    Common stock, $.01 par value; authorized
    500,000 shares; issued 231,000 shares 2,310
    Additional paid-in capital 731,090
    Accumulated other comprehensive loss (113,500)
    Retained earnings (deficit) (639,180)
    Treasury stock (60,580)
    Total Shareholders' Equity (Deficit) (79,860)

    TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,835,730

    Part B

    As stipulated, your company is having financial difficulty and has asked the bank to restructure its $3 million note outstanding. The present note has three 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.

    The company provides the following information related to its post-employment benefits for the year 2007:

    • Accumulated postretirement benefit obligation at January 1, 2007 $810,000
    • Actual and expected return on plan assets $34,000
    • Unrecognized prior service cost amortization $21,000
    • Discount rate 10%
    • Service cost $88,000

    Part A
    Provide your manager a comparison of the current reporting for debt, explaining the requirements for each type (bond, mortgage, capital lease, and others). Then, prepare the journal entries for the restructuring.

    Part B
    To satisfy various benefit issues that have arisen as a result of the restructuring, new post-employment benefits have been created. The company currently has a defined benefits plan and is considering switching to a defined contribution plan to save costs. Compute the costs associated with keeping the current plan versus the costs of a defined contribution plan where the employer pays 3% of payroll. The agreement is that the employees get to keep what is already in the defined benefit plan. This prevents the situation of having to compute how much the company would recapture in surplus assets resulting from terminating the old plan. Then, compute a new post-employment benefit expense for 2007 and report this to your manager. Illustrate with schedules and notes.

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    Solution Summary

    The solution examines restructuring debt using the settlement of debt methods. The financial troubles are analyzed.

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