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    Bond Indebtedness, Troubled Debt, Impairment and Concession

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    # 1
    Why would a company want to reduce its bond indebtedness before its bonds reach maturity? Indicate how this can be done and the correct accounting treatment for such a transaction.

    # 2
    a. In a troubled debt situation, why might the creditor grant concessions to the debtor?
    b. What type of concessions might a creditor grant the debtor in a troubled debt situation?
    c. What is meant by "impairment" of a loan? Under what circumstances should a creditor or debtor recognize an impaired loan?

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    Solution Preview

    Question # 1.

    Why would a company want to reduce its bond indebtedness before its bonds reach maturity? Indicate how this can be done and the correct accounting treatment for such a transaction.

    A company may want to reduce its bond indebtedness before the bonds reach maturity because maturity dates on bonds of all kinds may be very long. Based on this fact, a company may consider an alternative investment that would generate the same cash flow as a bond over a shorter period of time or one that would exceed the value of a matured bond, in turn increasing its cash flow.

    There are several ways a company can retire bonds before they reach maturity:

    ? By issuing callable bonds that may be called in and paid off at a price stipulated in the contract, ...

    Solution Summary

    Explinations and reasons why companies reduce bond indebtedness before its maturity, ways a company can retire bonds, why might the creditor grant concessions to the debtor all of importance in providing creditor and debtor latitude.

    $2.19

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