Assume that Great Beef Co. owes Bank of America $5,000,000 on a 3-year, 9% note originally issued
Question:
Assume that Great Beef Co. owes Bank of America $5,000,000 on a 3-year, 9% note originally issued at par. After one year of making scheduled payments, the firm faces financial difficulty. At the end of the second year, Great Beef owes Bank of America $5,000,000 plus $450,000 of accrued but unpaid interest. (Assume that the financial difficulty has increased the riskiness of Great Beef Co. to the point where it would have to pay 15 percent to borrow money.)
a. Assume that Bank of America restructures the note by forgiving the $450,000 interest payable, reducing the note principal to $4,500,000, and reducing the interest rate to 6 percent. Show the financial statement effects at the date of restructuring using the template below assuming that Great Beef Co. uses
(1) U.S. GAAP.
(2) IFRS.
b. Assume that Bank of America restructures the note by forgiving the $450,000 interest payable, reducing the note principal to $4,800,000, and reducing the interest rate to 7 percent. Show the financial statement effects at the date of restructuring using the template below assuming that Great Beef Co. uses
(1) U.S. GAAP.
(2) IFRS.
c. Comment on the differences between the two systems. Which reporting system better represents the underlying economics of the debt restructuring? Will U.S. GAAP supplemental disclosures provide similar information?Explain.
GAAPGenerally Accepted Accounting Principles (GAAP) is the accounting standard adopted by the U.S. Securities and Exchange Commission (SEC). While the SEC previously stated that it intends to move from U.S. GAAP to the International Financial Reporting Standards (IFRS), the...
Step by Step Answer:
Financial Reporting Financial Statement Analysis and Valuation a strategic perspective
ISBN: 978-1337614689
9th edition
Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw