AIS 302 CASE 1 2014 SPRING
MEMORANDUM
To: New World Publishing Inc.
From: Alex Wallace
Subject: Debt Exchange for New World Publishing Inc.
Date: February 18, 2014
Introduction Upon your request for suggestions on the exchange of debt, I examined and analyzed related events and current accounting codification regarding debt exchange. After performing analysis of the Accounting Standards Codification established by the Financial Accounting Standards Board (FASB), I have determined that New World should treat the exchange as a debt extinguishment instead of conversion of debt to equity during the year of 2013.
Possible Accounting Treatment New World exchanges a total of $1,200,000 bonds payable plus accrued interests of $140,000 by issuing 1,200,000 shares of common stock. There are two potential treatments for the transaction: conversion debt to equity and extinguishment of debt.
Conversion of Debt to Equity Conversion of Debt exchanges convertible bonds for preferred or common stocks depending on predetermined features at issuance. The accounting treatment of this approach is using book value method, $1,200,000 bonds payable and $140,000 accrued interest, and will not recognize any gains or losses in this case (Kieso et al., 885). However, this treatment does not apply for New World, which is a private placement of debt rather than convertible debt, according to the FASB Codification (Codification, 470-50-05-20). For debt without conversion rights, the extinguishment of debt approach applies (Codification, 470-50-15-2).
Extinguishment of Debt Under the extinguishment of debt approach, New World needs to recognize the difference between the carrying value of the debt and the fair value of common stock as gain or loss from extinguishment (Kieso et al., 775). Therefore, New World will recognize the 1,200,000 shares of common stock at fair value, a total of $1,500,000, and has a loss of $160,000, based on the fair value of $1.25 per share of common
To: New World Publishing Inc.
From: Alex Wallace
Subject: Debt Exchange for New World Publishing Inc.
Date: February 18, 2014
Introduction Upon your request for suggestions on the exchange of debt, I examined and analyzed related events and current accounting codification regarding debt exchange. After performing analysis of the Accounting Standards Codification established by the Financial Accounting Standards Board (FASB), I have determined that New World should treat the exchange as a debt extinguishment instead of conversion of debt to equity during the year of 2013.
Possible Accounting Treatment New World exchanges a total of $1,200,000 bonds payable plus accrued interests of $140,000 by issuing 1,200,000 shares of common stock. There are two potential treatments for the transaction: conversion debt to equity and extinguishment of debt.
Conversion of Debt to Equity Conversion of Debt exchanges convertible bonds for preferred or common stocks depending on predetermined features at issuance. The accounting treatment of this approach is using book value method, $1,200,000 bonds payable and $140,000 accrued interest, and will not recognize any gains or losses in this case (Kieso et al., 885). However, this treatment does not apply for New World, which is a private placement of debt rather than convertible debt, according to the FASB Codification (Codification, 470-50-05-20). For debt without conversion rights, the extinguishment of debt approach applies (Codification, 470-50-15-2).
Extinguishment of Debt Under the extinguishment of debt approach, New World needs to recognize the difference between the carrying value of the debt and the fair value of common stock as gain or loss from extinguishment (Kieso et al., 775). Therefore, New World will recognize the 1,200,000 shares of common stock at fair value, a total of $1,500,000, and has a loss of $160,000, based on the fair value of $1.25 per share of common