In an 11th-hour effort to avoid filing for Chapter 11 bankruptcy, commercial lender CIT Group Inc. offered its bondholders a debt exchange. The exchange offer expired on October 29, 2009. According to this exchange plan, CIT bondholders of older notes would receive between $700 and $900 in new debt plus between 0.41 and 3.26 of new preferred shares for every existing $1,000 bond tendered.

QUESTIONS:

1. Explain how this exchange would benefit CIT Group Inc. What are the potential costs or benefits for the bondholder?
2. Assume that you are a bondholder that takes advantage of the exchange. You hold 5 bonds and exchange them for $800 plus 3 shares of new preferred stock when the stock has a stated value of $1.20 per share. What journal entry would you make?
3. Assume the same information as in question 2 and make the journal entry that CIT Group Inc. would record on the exchange date.

SOURCE: Blandeburgo, B. “CIT Offers Debt Exchange, Draws Up Bankruptcy Plans,” Money Morning (Retrievable online at http://www.moneymorning.com/2009/10/03/cit-banking/)