USA Reclassing Long Term Debt to Additional Paid in Capital

Apr 24, 2019
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United States

Got a question that I need some professional help on. I am not a CPA nor have a full understanding of GAAP as it pertains to L/T Debt and APIC.
I do accounting for a S corp.

During the course of the year, the owner used his own money to cash infusion into the company. The intent was to have the company pay him back for this loan with interest. Currently there is a L/T Debt of 500,000 on the balance sheet as of 3/31/19.
As of 3/31/19 as well, there is a equity value of -896,000.
We are making small amounts of profit to chip away at this number.
We estimate April will be profit to bring this # to -796,000.

In the mean time, we are renewing our payroll ACH/direct deposit credit limit line. Our bank will look at this negative equity and I assume that they will cut this line as the company has no tangible equity.

The owner is suggesting that we submit the financial statements as is with a foot note about the long term debt being subordinated to the bank? (Can someone explain how this benefits the company)

However, additionally, the bank might come back and say that we should captialize it. While the journal entry would be to debit the L/T note and credit APIC, is this GAAP?

I do understand that if the S corp holder sells the APIC is considered taxble as that is cash/equity placed into the company rather than a "loan" as the L/T note was intended for.

I don't know what to do and I don't know if re-classing this to APIC is OK?

I hope someone can help explain this better to me.

Thank you in advance and I appreciate any answers that helps me understand this.



VIP Member
May 12, 2011
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United States
To be informed, you should ask to read the debt covenants from the bank related to the credit line.
I suspect the covenants specify that equity cannot be reduced without bank approval. That would explain the reason for converting the debt to APIC.
But to convert, the conversion should formally documented. This is sometimes done via a board resolution. But mgmt should at least provide you some proof to support your entry.

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