Memorandum: Research Project
Review the Requirements, Case, Sections 1, 2, and 3 to complete research memorandum
• The Research Memorandum must conform to APA format and be at least three to five pages in length, not including references.
• Spend no more than one page describing the situation.
• Paper must cite authoritative sources
As of January 1st, Landon Company owes First Bank $400,000 which is due on December 31st. Since Landon Company seems unable to repay the note, the bank agreed that Landon can settle this balance by agreeing to make four annual installments on each of the next four years, provided that it adds a “due on demand” clause to the note. Specifically, the lender will “do its best” not to call the note, provided that no adverse significant shift occurs in business operations. However, First Bank has the sole discretion to ascertain if adverse conditions arose, and then to call the note due immediately. How should Landon Company account for this situation?
The research will involve the classification or categorization of debt. At first glance, the case implies complexity around the exact treatment and/or definition of “due on demand” debts; the bank is giving the company a break by “extending” or, better yet, “modifying” the debt terms into a four-year agreement with annual installments but the key factor is the clause details, which grants the bank the right to call the note immediately. It is stated that in good faith the bank will do its best not to call the note prematurely. The main reason for the bank to call the note early is if it experiences significant adversity, and the bank has the sole discretion to ascertain these events.
My first impressions include interpretation of this type of debt being under current liabilities for the full amount; contrarily to the annual installment amount only. Some research challenges may include not finding the appropriate authoritative literature that addresses this scenario and applying professional judgment to determine solution.
The background for case 2 involves researching the different types of debt public and private companies may hold, and how they must display on their financial statements. The problem statement is how do public and private companies accounts for “due on demand” debt or demand note. Is there a difference between public and private? Are there subcategories on “on-demand” debt? Could long-term debts be split into subsequent smaller “on-demand” debts? Is there a pre-requisite to convert long-term debt to on-demand debt?
My first assumption is that on-demand debts may be treated as current liabilities based on the rights granted to creditor to call debt at any time despite the stated terms. It is still unclear to me if there is a difference in treatment between public and private companies. And case 2 does not specify whether any of the companies involved is either public or private.
How a company should account for short-term and long-term schedule of payments due should also be addressed in the problem statement.
Key terms for case two should include short-term and long-term debt, current liabilities, bank-issued demand notes, etc. Starting with both types of debts, determining and stating how companies must account for both different debt types is essential. Also different types of liabilities should be stated and how this impacts reporting. Demand notes and its variants would clarify what type of notes or loans those are and how to account for them. Additional key terms may surface as I progress in the research and find alternatives, such as troubled debt restructuring, stating similarities and differences related to case two.