At December 31, 2014, MIC had $20 million in 12% bonds payable, due in December 2018. The CFO recently returned from New York where he met with a couple of investment bankers and, based on those discussions, he believes that MIC can issue $20 million in new bonds to different investors bearing interest at 10%. The 12% bonds allow for prepayment by MIC beginning in 2015. Unamortized costs relating to the bonds total $500,000. The CFO estimates the investment banking, legal and accounting costs to execute the transaction should total $2 million.
a. Assuming MIC goes forward with this transaction, would this be an extinguishment or a modification of debt?
b. If this is considered an extinguishment of debt, how would the costs associated with this transaction be treated using US GAAP and IFRS?
c. Prepare a journal entry to record this transaction, assuming this was an extinguishment of debt, using US GAAP and IFRS.
d. Use the same situation above, except assume the investment bankers have been able to negotiate with the 12% bondholder and they have agreed to reduce the interest rate on the debt to 11% beginning January 1, 2015. Fees for the reduction in interest will total $500,000. Is this deemed as a modification of terms?
e. If this is considered a modification of terms, how would the costs associated with this transaction be treated using US GAAP and IFRS?
At December 31, 2014, MIC had $20 million in 12% bonds payable, due in December 2018. The CFO recently returned from New York where he met with a couple of investment bankers and, based on those discussions, he believes that MIC can issue $20 million in new bonds to different investors bearing interest at 10%. The 12% bonds allow for prepayment by MIC beginning in 2015. Unamortized costs relating to the bonds total $500,000. The CFO estimates the investment banking, legal and accounting costs to execute the transaction should total $2 million.
a. Assuming MIC goes forward with this transaction, would this be an extinguishment or a modification of debt?
b. If this is considered an extinguishment of debt, how would the costs associated with this transaction be treated using US GAAP and IFRS?
c. Prepare a journal entry to record this transaction, assuming this was an extinguishment of debt, using US GAAP and IFRS.
d. Use the same situation above, except assume the investment bankers have been able to negotiate with the 12% bondholder and they have agreed to reduce the interest rate on the debt to 11% beginning January 1, 2015. Fees for the reduction in interest will total $500,000. Is this deemed as a modification of terms?
e. If this is considered a modification of terms, how would the costs associated with this transaction be treated using US GAAP and IFRS?