Restructuring Debt

Restructuring Debt

When a company is having financial difficulties, occasionally creditors will restructure debt in order to avoid significant losses. Common examples of long-term debt include bonds, mortgages, and capital leases. To understand the restructuring process, one must first understand the reporting requirements for different types of long-term debt.

Bonds

Companies issue bonds as a means of raising large amounts of capital. A bond is a financial instrument in which the issuer promises to pay a specific amount (face value) on a specific date (maturity date) in addition to periodic payments of interest. If the company had a bond, it would report it as a long-term liability on the balance sheet. Any restrictions or covenants of a bond should be reported in either the body or the notes of the financial statement. Bonds are recorded at face value "minus any unamortized discount or plus any unamortized premium" (Kieso, Weygandt, & Warfield, 2007, pg. 679). Discounts received or premiums paid on a bond occur because market conditions and the financial situation of the company can change between the time the company sets the terms and issuance of the bond. These changes can affect the marketability of the bond in comparison to other bonds available for sale (Kieso, Weygandt, & Warfield, 2007).

Mortgage Note Payable

Another means of financing available to companies is a mortgage note. A mortgage note is secured by a mortgage taken as a lien on real property. It is reported as long-term debt on the balance sheet in the secured notes payable section for any portion of the note that is due in more than one year. The portion of the mortgage note that is due in the next year is reported in the current liability section of the balance sheet. A description of the property pledged as collateral should be included in the notes of the financial statement. A mortgage note differs from a bond in that the interest rate may be fixed or variable on a note. There are generally more covenants or restrictions on a note than there are on a bond (Kieso, Weygandt, & Warfield, 2007).

Capital Lease

Sometimes companies finance asset purchases through lease agreements. There are several reasons a company may choose to lease rather than purchase an asset. A few of the reasons include that it provides 100% financing and companies find it is often less costly than other means of financing. In certain cases, a company can take advantage of depreciation for tax purposes without having to report an asset or liability on the balance sheet. If the lease meets the criteria of a capital lease, it is recorded at "the present value of the rental payments" (Kieso, Weygandt, & Warfield, 2007, pg. 1092). A portion of each lease payment is interest expense with the remainder reducing