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Troubled Debt Restructuring—Modification of Terms In the latter part of 2007, Odessa Company experienced severe financial pressure and was in default of meeting interest payments on long term notes of $6,000,000 due on December 31, 2012. The interest rate on the debt...

Leave My Current Ratio Alone! Soto Inc., a closely held corporation, has never been audited and is seeking a large bank loan for plant expansion. The bank has requested audited financial statements. In conference with the president and majority stockholder of Soto,...

Accounting for Bonds Startup Company decided to issue $100,000 worth of 10%, 5 year bonds dated January 1, 2007, with interest payable semiannually on January 1 and July 1 of each year. Due to printing and other delays, Startup was not able to sell the bonds until...

Is There a Loss on Conversion? Holton Co. recently issued $1,000,000 face value, 8%, 30 year debentures at 97. The debentures are callable at 103 upon 30 days’ notice by the issuer at any time beginning five years after the date of issue. The debentures are...

Deferred Interest and Interest Rate Resets Corporations commonly incur debt in financing the acquisition of other companies or in fighting takeover attacks by competitors. Two strategies often employed involve deferring interest payments and incorporating interest...

Circle K Corporation and Its Debt Covenants When companies raise money through the issuance of bonds or other long term debt instruments, debt holders typically require the company to comply with certain conditions, or covenants. The notes to Circle K’s 1989 financial...

In Substance Defeasance Another form of early extinguishment of debt is referred to as in substance defeasance, or economic defeasance. In substance defeasance is a process of transferring assets, generally cash and securities, to an irrevocable trust, and using the...

Accounting for a Basic Stock Based Compensation Plan On January 1, the company granted 100,000 stock options to key employees. Each option allows an employee to buy one share of $1 par common stock for $30, which was the market price of the shares on the grant date of...

Accounting for a Written Put Option On January 1,Year 1, the company wrote a put option agreeing to purchase 100 shares of its own stock for $50 per share on December 31,Year 2, at the option of the purchaser of the put option. The market price of the company’s shares...