How to record bond Payment-In-Kind (PIK) transaction?

[nebfinfm]

Hello Mark,

I have a corporate bond that paid interest in additional bonds rather than in cash. (FYI Investopedia defines PIK: Payment-in-kind bonds are considered a type of deferred coupon bond.... The types of companies that issue these bonds may be financially distressed....)

Please help how to record this PIG err. PIK.

Thanks Nebfinfm

[Mark]

Hi Nebfinfm,

Are these bonds they issued the same bonds, or different? If they are the same then I would suggest just recording a split or a reinvested distribution. If the paid interest is taxable, then you could record a reinvested distribution of type interest. If the event was not taxable, then a split would work.

[nebfinfm]

Hi Mark,

The bonds are new bonds with different ISIN. The corporation was restructured and their bond have been exchanged. My question is how to record PIK payments. For example the initial amount of bond was 3641, now I received additional 200 (ratio was 0.055:1). Furthermore I think that the corporation is in fact bankrupt and the bond value is or will be zero!
Thanks Nebfinfm

[Mark]

Hi Nebfinfm,

After this transaction do all the bonds have this new ISIN, or only the bonds issued for the interest payment?

[nebfinfm]

The original bonds have been replaced and cancelled - don't exist anymore. Current bonds and PIK have same new ISIN. Up to now this new bond paid 3x semiannual PIK only, no cash interest...

Thanks nebfinfm

[Mark]

Hi Nebfinfm,

Sounds like a split transaction, plus a name/isin change will be appropriate. If the interest is taxable, use a reinvested distribution of type interest. You will want to change name/isin in both cases.