Reorganization and Troubled Debt Restructuring

CORPORATION IN FINANCIAL DIFFICULTY:
“REORGANIZATION AND
TROUBLED DEBT
RESTRUCTURING”
Learning objectives
After studying this chapter you would be able to:

❏ Understand the nature and process of
reorganization and troubled debt restructuring.
❏ Know the accounting process for restructuring
and reorganizing debt for corporation
experiencing financial difficulties.
Introduction
A corporation experiencing financial difficulty has number of
alternatives aside from liquidating company’s assets or declaring
bankruptcy. Reorganization and debt restructuring are
arrangements with the creditors to fix the company, reorganize and
reconstruct to be able to return its operation to its normal pace.
This chapter will present the procedures in accounting for
reorganization and troubled debt restructuring and major actions
used by corporations experiencing financial problems.
REORGANIZATIO
N
What is Reorganization?
Reorganization distinct from liquidation is that control over

the company is normally retained by the ownership (referred as
debtor in possession).
However the Securities and Exchange Commission (SEC)
may appoint a trustee because of fraud, gross mismanagement
by current owners or managers, or to protect the interest of
creditors or stockholders of the company (Guerrero, 2017).
Plan for Reorganization
• The plan should be submitted by the management to the
company's creditors and stockholders and to the SEC for
approval.
• Must include provisions altering or modifying the

interests, and rightof the creditors and stockholders of
the company, as well as a number of additional
provisions.
• SEC will review the plan, but before the plan will be confirmed,
it must be first accepted by a majority of the creditors and by
stockholders owning at least two-thirds (2/3) of the outstanding
capital stock.
• Incase some of the stockholders and creditors will not accept

the plan, SEC may still confirm the plan for reorganization if it
is fair and equitable to the nonacceptors.
• Confirmation of the plan by the SEC makes the plan binding on

the debtor, all creditors and stockholders.
ACCOUNTING FOR REORGANIZATION
• The ownership of the common stock of such

company as a result of reorganization, it is no
longer controlled by its former stockholders.
• Asset and liabilities should be valued at current
fair values and the stock holders equity consist
only of paid in capital.
The accounting for reorganization usually requires the
following that results to a fresh start accounting,
a. Journal entries for adjustments of book values of

assets.
b. Reductions of par value or stated value of capital
stock (with recognition of resultant additional paid in
capital for the excess of par.
c. Extension of due dates and revision of interest
rates of notes payable
d. Exchanges of equity securities for debt securities
e. Elimination of retained earnings deficit

TROUBLED
DEBT
RESTRUCTURIN
G
What is Troubled Debt Restructuring?
Debt restructuring is a situation where the

creditor for economic or legal reasons related to
financial difficulties grants to the debtor concession
that would not otherwise be granted in a normal
business relation (Valix, 2017).
Common form of troubled debt restructuring
A. Asset or Equity Swap
B. Modification of Terms - It may include:
1. Reduction of the stated interest rate for the
remainder of the original debt.
2. Extension of maturity date at a lower rate.
3. Reduction of the face amount of the original
debt.
4. Reduction in the accrued interest.
- Debtor recognizes gain
Carrying Value of Debt
for the difference.
is Greater than the
- All cash payments are
Modified Future Cash
reductions in principal (no
Flows
interest).
Modification
of terms
- No gain/loss recognized.
- Compute new effective
Carrying Value of Debt
interest rate
is Less than the
- Record annual interest at
Modified Future Cash
new rate.
Flows
Illustration
Cookie Corporation is financially distressed and is evaluating a
variety of restructuring alternatives.
1. On December 31, 2016, the company has an unsecured current

liability of P30,000 to the Creditor Company, on which P3,000
interest has been accrued an unpaid.
2. Cookie Corporation has been negotiating with Creditor Company
to restructure the current debt of P33,000 including accrued interest.
Alternative 1: Payment of Cash in Full Settlement of
Debt - The immediate transfer of P27,000 in full
settlement of the book value of the debt.
Notes Payable P30,000

Accrued Interest 3,000
Total Liability P33,000
Cash Payment 27,000
Gain on restructuring of debt P 6,000
Entry on December 31, 2016 for Cookie Corporation:

Accrued Interest Payable 3,000
Cash P27,000 *Gain on
restructuring of debt 6,000
*Gain is reported as part of continuing operation.

Alternative 2: Payment of Non-cash Assets in Settlement of
Debt - Transfer inventory with a book value of 45,000 and fair
value of 26,000 in full settlement of the P33,000 debt.
A. Gain/Loss on disposal of asset
Fair Value of Inventory P26,000

Carrying Amount of Inventory (45,000)
Loss on Disposal P19,000
B. Gain/Loss on Restructuring

Accrued Interest 3,000
Total Liability P33,000
Fair Value of Inventory 26,000
Gain on restructuring of debt P 7,000
Carrying Amount Carrying Amount
Fair Value of
of Debt of Asset
Asset
Gain/Loss on Gain/Loss on
restructuring of dispossal of assets
debt
C. Entry on December 31, 2016 for Cookie Corporation:
Notes Payable P 30,000

Loss on disposal of inventory 19,000
Inventory P 45,000
Gain on restructuring of debt 7,000
Alternative 3: Modification of Terms
Case A: Carrying Value of Debt is Greater than the Modified
Future Cash Flows
Terms being modified in the contract:
a. Forgive accrued interest of P3,000.

b. Reduce the interest rate of 10% to 5%.
c. Extend the maturity for 1 additional year.
COMPUTATION
Accrued interest 3,000
Carrying Value of Debt P33,000
Future Notes Payable P30,000

Future interest
(30,000×5%×1) 1,500
Total Future Cash Flows (31,500)
Gain on restructuring debt P 1,500
JOURNAL ENTRY
Notes Payable - old P 30,000

Notes Payable - new P 31,500
Gain on restructuring of debt 1,500
Case B: Carrying Value of Debt is Less than the Modified
Future Cash Flows
Terms being modified in the contract:
a. Forgive P500 of accrued interest.

b. Reduce interest from 10% to 5%.
c. Extend maturity for additional 1 year.
COMPUTATION
Accrued interest 3,000
Carrying Value of Debt P33,000
Future Notes Payable P30,000

Remaining accrued interest
(3,000 - 500) 2,500
Future interest (30,000×5%×1) 1,500
Total Future Cash Flows (34,000)
Gain on restructuring debt P 1,000
JOURNAL ENTRY
To record restructuring of debt:
Notes Payable - old P30,000

Notes Payable - new P33,000
To record payment of debt:
Interest expense P1,000

Notes Payable - new 33,000
Cash P34,000
The restructured debt is stated at P33,000 and a total of

P1,000 of interest expense will be recognize over the term to
maturity of the restructured debt.

Reorganization and Troubled Debt Restructuring

Uploaded by

Copyright:

Available Formats

Reorganization and Troubled Debt Restructuring

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Reorganization and Troubled Debt Restructuring

Uploaded by

Copyright:

Available Formats

CORPORATION IN FINANCIAL DIFFICULTY:

After studying this chapter you would be able to:

Reorganization distinct from liquidation is that control over

• Must include provisions altering or modifying the

• Incase some of the stockholders and creditors will not accept

• Confirmation of the plan by the SEC makes the plan binding on

• The ownership of the common stock of such

a. Journal entries for adjustments of book values of

d. Exchanges of equity securities for debt securities

e. Elimination of retained earnings deficit

Debt restructuring is a situation where the

1. On December 31, 2016, the company has an unsecured current

Notes Payable P30,000

Notes Payable P30,000

*Gain is reported as part of continuing operation.

A. Gain/Loss on disposal of asset

Fair Value of Inventory P26,000

Notes Payable P30,000

Notes Payable P 30,000

Terms being modified in the contract:

a. Forgive accrued interest of P3,000.

Future Notes Payable P30,000

Notes Payable - old P 30,000

Terms being modified in the contract:

a. Forgive P500 of accrued interest.

Future Notes Payable P30,000

To record restructuring of debt:

Notes Payable - old P30,000

Interest expense P1,000

The restructured debt is stated at P33,000 and a total of

You might also like