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During 2016, Company X repurchased a total of $181.9 million principal amount of existing senior subordinated...

During 2016, Company X repurchased a total of $181.9 million principal amount of existing senior subordinated notes in open market transactions, consisting of the following :

- $9.8 million principal amount of our 2021 (maturity) Notes

- $66.1 million principal amount of our 2022 (maturity) Notes

- and $106.0 million principal amount of our 2023 (maturity) Notes for

Total purchase price for the notes is $76.7 million, excluding accrued interest. The repurchases were made at prices ranging from approximately 25% to 75% of the principal amount of the individual senior subordinated notes.

In connection with these series of transactions, during 2016 Company X recognized a $103.1 million gain on debt extinguishment, net of unamortized debt issuance costs written off.

Company X currently estimate combined annual cash interest savings of approximately $7 million related to these repurchases and the exchange transactions.

a. Describe the transaction in accounting terms.

b. Reconstruct the journal entry for the restructuring transaction.

c. Reconstruct the journal entry for payment of interest during 2016, including and the capitalized interest.

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Answer #1

(a)

The result of above will be as follows Paticulars As reported 2002 Preferred as debt 2002 2001 2001 S117 1,67S1,694S1,671 S702 S1,788S1,951S2,490 (S in million) $257 S1,694 $800 S2,751 S117 $257 Short-term borrowin Notes payable Preferred capital securities as debt SO SO Total debt S50 SO S3.895$3.465 S3.895 S4,647S4,315S3,945 S50 S702 S50 $800 Redeemable preferred stock Preferred capital securities as e Common stockholders equity S50 SO $3,465 S3,515 Total equity Long-term debt to equit 0.38 0.45 0.63 0.78 When the Preferred capital securities are considered as equity the long-term debt to equity ratio for 2002 is 0.38. For 2001 is 0.45 and when the preferred capital securities are considered as a debt the long-term debt to equity ratio for 2002 is 0.63 and for 2001 is 0.78. The later ratios provide the actual financial condition of Company A(b)

Now further entries are required to record the interest expense on debt component. Provide a journal entry to record the interest expense: Date Post Ref Debit Accounts, Titles & Explanations Interest expense Credit $7.842,000 Notes payable 7,842,000 (To record the interest expense on debt component at 6%) Interest expense account is debited to record the interest expense at the rate of 6% on debt component of convertible notes and notes payable account is credited to record the liability of interest expense.(c)

Provide a joumal entry to record the issue of convertible debt under GAAP DateAccounts, Titles & Explanations Post Ref Credit Debit 300,000,000 Cash $250,000,000 S50,000,000 Convertible Debt Paid in capital-Conversion feature To record the debt and equity component in issue of convertible notes The cash account is debited to record the cash received from debt holders and Convertible debt account is credited to record the debt component of convertible debts. Paid in capital-Conversion feature account is credited to record the equity component of convertible notes. The interest expense will be recorded at 7% on $250 million over the expected life of the debt.

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