Jefferson Corporation has $20,000,000 of 10% bonds outstanding. Because of cash flow problems, the company is behind
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The CPA firm performing the annual audit, however, does not agree with this treatment. The auditors argue that this transfer represents a troubled debt restructuring due to the significant concessions made by the bondholders, and under these conditions, the FASB requires Jefferson to use the market value of the preferred stock as its recorded value. The difference between the $20,000,000 face value of the bonds and the $10,000,000 market value of the preferred stock is a reportable gain.
The controller of Jefferson, L. Rogers, is flabbergasted. “Here we are, almost bankrupt, and you tell us we must report the $10,000,000 as a gain. I don’t care what the FASB says; that’s a ridiculous situation. You can’t be serious.”
The auditor in charge of the engagement is adamant. “We really have no choice. You have had a forgiveness of debt for $10,000,000. You had use of the money, and based on current conditions, you won’t have to pay it back. That situation looks like a gain to me.”
What position do you think should be taken? Consider the external users of the financial statements and their needs in your discussion.
Financial Statements
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial... Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...
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Related Book For
Intermediate Accounting
ISBN: 978-0324592375
17th Edition
Authors: James D. Stice, Earl K. Stice, Fred Skousen
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