recourse debt

(noun)

a debt that is not backed by collateral from the borrower.

Related Terms

Examples of recourse debt in the following topics:

  • Current Obligations Expected to Be Refinanced

    • Refinancing may refer to the replacement of an existing debt obligation with a debt obligation under different terms.
    • If the replacement of debt occurs under financial distress, refinancing might be referred to as debt restructuring.
    • A loan or other type of debt can be refinanced for various reasons:
    • In some jurisdictions, refinanced mortgage loans are considered recourse debt, meaning that the borrower is liable in case of default, while un-refinanced mortgages are non-recourse debt.
    • Refinanced debt must be finalized and the new loan terms approved before reporting it and replacing it for the old debt in the liability section.

  • Debt-to-Equity Ratio

    • The Debt-to-Equity Ratio is a financial ratio that compares the debt of a company to its equity and is closely related to leveraging.
    • The Debt-to-Equity Ratio is a financial ratio indicating the relative proportion of shareholder's equity and debt used to finance a company's assets, and is calculated as total debt / total equity.
    • Debt is typically a long-term liability that represents a company's obligation to pay both principal and interest to purchasers of that debt.
    • Calculating a company's debt to equity ratio is straight forward, and the debt and equity components can be found on a company's respective balance sheet.
    • For more advanced analysis, financial analysts can calculate a company's debt to equity ratio using market values if both the debt and equity are publicly traded.

  • Accounting for Sale of Debt

    • How debt sales are recorded depends on whether the debt is classified as "held-to-maturity," "a trading security," or "available-for-sale".
    • When debt is acquired and is intended to be held until maturity, it is recorded first by debiting a "Debt Investment Account," and then by crediting "Cash" for the amount the debt was purchased.
    • While the market value of the debt may vary over time, the company does not need to adjust the value of the debt on its books.
    • If a company acquired debt for $1000, and this debt is classified as a trading security, the company would still need to make the first journal entry in the aforementioned manner.That being said, the value of the debt on the owner's books must be adjusted to match the market value of the debt.
    • If a company acquires debt that is available-for-sale, it would still need to make a first journal entry in the same way that it would if the debt was "held-to-maturity" or a "trading security. " It would also need to adjust the value of its debt asset in relation to its current market value.

  • Analyzing Long-Term Liabilities

    • Analyzing long-term liabilities combines debt ratio analysis, credit analysis and market analysis to assess a company's financial strength.
    • Standard & Poor's is a credit rating agency that issues credit ratings for the debt of public and private companies.
    • Popular debt ratios include: debt ratio, debt to equity, long-term debt to equity, times interest earned ratio (interest coverage ratio), and debt service coverage ratio.
    • $\frac { Long-Term\quad Debt\quad +\quad Value\quad of\quad Leases }{ Average\quad Shareholders\quad Equity }$
    • Countries issue debt to build national infrastructure.

  • Valuing Accounts Receivable

    • These uncollectible accounts are called bad debts.
    • Companies use two methods to account for bad debts: the direct write-off method and the allowance method.
    • For tax purposes, companies must use the direct write-off method, under which bad debts are recognized only after the company is certain the debt will not be paid.
    • Recognizing the bad debt requires a journal entry that increases a bad debts expense account and decreases accounts receivable.
    • The adjusting entry to estimate the expected value of bad debts does not reduce accounts receivable directly.

  • Amortized Cost Method

    • Debt held to maturity is shown on the balance sheet at the amortized acquisition cost.
    • The definition of a debt is held-to-maturity is a debt which the company has both the ability and intent to hold until maturity.
    • All changes in market value are ignored for debt held to maturity.
    • Debt held to maturity is shown on the balance sheet at the amortized acquisition cost.
    • Explain how a company would apply the amortized cost method to a debt held to maturity

  • Dealing with Foreign Currency and Bad Debts

    • The allowance for bad debt/doubtful accounts is a permanent account.
    • While the corresponding bad debt expense account is a temporary account that is zeroed out annually.
    • The amount of the bad debt provision can be computed in two ways: either by reviewing each individual debt and deciding whether it is doubtful (a specific provision), or by providing for a fixed percentage (e.g. 2%) of total debtors (a general provision).
    • The change in the bad debt provision from year to year is posted to the bad debt expense account in the income statement .
    • Explain how the "gain or loss" account is used for foreign currency transactions and bad debts

  • Current Maturities of Long-Term Debt

    • Examples of long-term liabilities are debentures, bonds, mortgage loans and other bank loans (it should be noted that not all bank loans are long term since not all are paid over a period greater than one year. ) Also long-term liabilities are a way for a company to show the existence of debt that can be paid in a time period longer than one year, a sign that the company is able to obtain long-term financing .
    • The position of where the debt should be disclosed is based on its maturity date in relation to the due date of other current liabilities.
    • For example, a loan for which two payments of USD 1,000 are due--one in the next 12 months and the other after that date--would be split into one USD 1000 portion of the debt classified as a current liability, and the other USD 1000 as a long-term liability (note this example does not take into account any interest or discounting effects, which may be required depending on the accounting rules that may apply).
    • Bonds are a form of long-term debt because they typically mature several years after their original issue date.
    • Explain the reporting of the current portion of a long-term debt

  • Classifying Liabilities

    • When a debt becomes callable in the upcoming year (or operating cycle, if longer), the debt is required to be classified as current, even if it is not expected to be called.
    • If a particular creditor has the right to demand payment because of an existing violation of a provision or debt statement, then that debt should be classified as current also.
    • In situations where a debt is not yet callable, but will be callable within the year if a violation is not corrected within a specified grace period, that debt should be considered current.
    • The only conditions under which the debt would not be classified as current would be if it's probable that the violation will be collected or waived.
    • A business can have different liabilities depending on the debt instruments into which they enter.

  • Recognizing Notes Receivable

    • The first method is the allowance method, which establishes a contra-asset account, allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable.
    • The amount of the bad debt provision can be computed in two ways, either (1) by reviewing each individual debt and deciding whether it is doubtful (a specific provision); or (2) by providing for a fixed percentage (e.g. 2%) of total debtors (a general provision).
    • The change in the bad debt provision from year to year is posted to the bad debt expense account in the income statement.
    • The entry would consist of debiting a bad debt expense account and crediting the respective accounts receivable in the sales ledger.
    • The two methods are not mutually exclusive, and some businesses will have a provision for doubtful debts, writing off specific debts that they know to be bad (for example, if the debtor has gone into liquidation. )