ch18_Beams12ge_SM.doc

Chapter 18

CORPORATE LIQUIDATIONS and REORGANIZATIONS Answers to Questions 1

Chapter 7 bankruptcy bankruptcy ! "here the entty ! app#nted t# !e$$ #%% #%% a!!et! a!!et! #% the entty and pay c$a& t# the credt#r!' credt#r!' !# ba!ca$$y' ba!ca$$y' a $(udat#n "#u$d be needed) needed) *ean"h$e' *ean"h$e' chapter ++ bankruptcy bankruptcy n,#$,e! n,#$,e! a rehab$tat#n t# the debt#r entty' n "hch a re#r-an.at#n "#u$d be e/pected t# happen) 0a!ed #n the nature #% b#th bankruptcy' chapter ++ ! u!ua$$y ntated %r!t' "here the debt#r entty "#u$d ha,e the chance t# ne-#tate t# !ett$e a$$ c$a&! and c#ntnue t# #perate) I% chapter ++ ! %a$ed t# carred #ut then chapter 7 ! ntated "here the debt#r entty "#u$d be $(udated and cea!e t# #perate)

2

Order #% re$e% ! an #rder %r#& the c#urt t# pr#tect the debt#r entty %r#& bankruptcy) I% the #rder ! !!ued then the debt#r entty "#u$d be pr#tected a-an!t any $t-at#n "h$e the c#urt !uper,!e a re#r-an.at#n p$an "here t he credt#r and debt#r entty ne-#tate the th e p$an %#r !ett$n- a$ $ the c$a&!)

3

The dute! #% the U)S) tru!tee are t# &antan and !uper,!e a pane$ #% pr,ate tru!tee! e$-b$e t# !er,e n Chapter Chapter 7 ca!e! ca!e!'' t# !er,e a! tru!tee tru!tee #r nter& nter& tru!tee tru!tee n !#&e !#&e bankrup bankruptcy tcy ca!e!' ca!e!' t# !up !uper, er,!e !e the ad&n!tr ad&n!trat#n at#n #% bankrup bankruptcy tcy ca!e!' ca!e!' and t# pre!d pre!dee #,er #,er credt# credt#rr &eetn&eetn-!) !) 0ankrup 0ankruptcy tcy 1ud-e! 1ud-e! !t$$ !uper,!e ca!e! n d!trct! "th#ut U)S) tru!tee!)

4

The debt#r c#rp#rat#n n a bankruptcy ca!e ha! the %#$$#"n- dute!2 3+4 t# %$e a $!t #% credt#r!' a !chedu$e #% a!!et! and $ab$te!' and a !tate&ent #% the debt#r5! %nanca$ a%%ar!6 34 t# c##perate "th the tru!tee tru!tee !# that the tru!tee tru!tee &ay per%#r& per%#r& h! dute! dute!66 384 T# !urrende !urrenderr a$$ pr#per pr#perty ty'' nc$udn nc$udn- b##k b##k!' !' d#cu&ent!' rec#rd!' and !# #n' t# the tru!tee6 and 394 t# appear at hearn-! #% the bankruptcy c#urt a! re(ured)

5

A tru!tee ! n#t app#nted n a$$ Tt$e ++ ca!e!) In Chapter 7 ca!e!' a tru!tee "$$ be e$ected by un!ecured credt#r! % a &a1#rty #% credt#r! ,#te %#r the tru!tee' and th#!e credt#r! h#$d at $ea!t : percent #% the c$a&!) c$a&!) Other"! Other"!e' e' an app#nte app#nted d nter& nter& tru!tee tru!tee !er,e! !er,e! a! tru!tee tru!tee)) In Chapter Chapter ++ ca!e! ca!e! a tru!tee tru!tee ! app#nted #n$y % dee&ed nece!!ary by the c#urt' but #ther"!e' the debt#r re&an! n p#!!e!!#n #% the e!tate and per%#r&! the dute! #% a tru!tee) ;thn 8: day! %r#& the t&e the c#urt #rder! the app#nt&ent #% a tru!tee n a Chapter ++ ca!e' a party n ntere!t &ay re(ue!t the e$ect#n #% a tru!tee)

6

The tru!tee n a $(udat#n ca!e take! p#!!e!!#n #% the debt#r5! e!tate' c#n,ert! e!tate a!!et! nt# ca!h' and d!trbute! the pr#ceed! a! drected by the c#urt) They a$!# per%#r&! #ther dute! !uch a! n,e!t-atnthe %nanca$ a%%ar! #% the debt#r' pr#,dn- n%#r&at#n ab#ut the e!tate t# parte! #% ntere!t' e/a&nncredt#r c$a&! and #b1ectn- t# th#!e that appear &pr#per' #peratn- the debt#r5! bu!ne!! % auth#r.ed t# d# !# by the c#urt' pr#,dn- %nanca$ rep#rt! and !u&&are! ab#ut the e!tate t# the c#urt' and %$nrep#rt! #n tru!tee!hp a! drected by the c#urt)

7

The pr#rty rankn-! n a Chapter 7 $(udat#n ca!e are !u&&ar.ed n E/hbt +<= #% the te/t) The pr#rte! rec#-n.ed %#r un!ecured c$a&! c$a& ! 3Rank II4 are2 3+4 ad&n!trat ad& n!trat,e ,e e/pen!e!' 34 c$a&! ncurred bet"een an n,#$untary  n,#$untary %$ n- and an d app#nt&ent app#n t&ent #% a tru!tee' 384 !a$ary c$a &! up t# >++'7? per nd,dua$ earned earned "thn "thn +<: day! #% %$n-' %$n-' 394 e&p$#ye e&p$#yeee bene% bene%t t p$an c#ntrb c#ntrbut# ut#n n c$a&! c$a&! up t# >++'7 >++'7? ? per nd,dua$ earned "thn +<: day! #% %$n-' 3?4 nd,dua$ c$a&! up t# >'@:: %#r -##d! and !er,ce! purcha!ed %r#&' but n#t pr#,ded by the debt#r' and 3@4 c$a&! #% -#,ern&enta$ unt! %#r ta/e! t a/e! #"ed by the debt#r 3!ub1ect t# t&e re!trct#n!4' nc$udn- ta/e! c#$$ected and "thhe$d %#r "hch the debt#r ! $ab$e)

8

#ur rank! "thn the un!ecured n#npr#rty c$a& cate-#ry 3-enera$ un!ecured c$a&!4 are2 3+4 c$a&! a$$#"ed that "ere t&e$y %$ed' 34 c$a&! a$$#"ed "here pr##% "a! %$ed $ate' 384 c$a&! a$$#"ed %#r %ne!' pena$te! #r %#r%eture!' #r da&a-e!' and ar!n- be%#re the c#urt #rder %#r re$e% #r app#nt&ent #% a tru!tee' and 394 c$a&! %#r ntere!t #n un!ecured c$a&!) The acc#untant5! !tate&ent #% a%%ar! ! a %nanca$ !tate&ent that ! de!-ned t# pr#,de n%#r&at#n ab#ut $(udat#n ,a$ue! and pr#rty rankn-! %#r u!e by the tru!tee' the c#urt' credt#r!' and #ther ntere!ted Copyright © 2015 Pearson Education Limited

9

18- 2

10

Corporate Liquidations and Reorganizations

parte! n the debt#r5! e!tate) A!!et! are &ea!ured at e/pected net rea$.ab$e ,a$ue! n the !tate&ent' but b##k ,a$ue! are a$!# nc$uded %#r re%erence purp#!e!) A debt#r c#rp#rat#n5! e!tate &ay be $(udated e,en th#u-h the %$n- ! under Chapter ++) Th! can #ccur "hen the ca!e ! tran!%erred t# Chapter 7 %#r $(udat#n) It can a$!# be carred #ut n acc#rdance "th an appr#,ed Chapter ++ p$an #% re#r-an.at#n that ca$$! %#r !a$e and d!trbut#n #% the pr#ceed! %r#& the debt#r c#rp#rat#n5! e!tate)

11

A debt#r n p#!!e!!#n re#r-an.at#n ca!e ! a Chapter ++ ca!e n "hch the bankruptcy c#urt d#e! n#t app#nt a tru!tee' but n!tead' a$$#"! the debt#r c#rp#rat#n t# carry #ut the dute! that #ther"!e "#u$d be per%#r&ed by a tru!tee)

12

A credt#r c#&&ttee can %$e a p$an #% re#r-an.at#n under a Chapter ++ ca!e a%ter +: day! %r#& the date the c#urt #rder %#r re$e% ! -ranted) The #rder %#r re$e% #ccur! "hen the debt#r #r credt#r5! %$n pett#n ! appr#,ed by the c#urt)

13

The appr#,a$ #% a p$an #% re#r-an.at#n re(ure! acceptance #% the p$an by at $ea!t t"#Bthrd! n d#$$ar a&#unt #% c$a& h#$der! and #,er ha$% n nu&ber #% c$a&! n each c$a!! #% c$a&!) urther' each c$a!! #% c$a&! &u!t accept the p$an #r n#t be &pared under t) A c$a!! #% c$a&! that "#u$d rece,e n#thn- % the c#rp#rat#n "ere $(udated ! n#t &pared % t rece,e! n#thn- under a p$an and' acc#rdn-$y' acceptance by that c$a!! #% c$a&! ! n#t re(ured)

14

Prepetition liabilities are the $ab$te! #% an enterpr!e that "ere ncurred pr#r t# a Chapter ++ %$n-) They are rep#rted at the a&#unt! a$$#"ed by the bankruptcy c#urt) Prepetition liabilities subject to compromise are th#!e $ab$te! that &ay be &pared by a p$an and that are e$-b$e %#r c#&pr#&!e becau!e they are ether un!ecured #r under!ecured)

15

Snce the c#&pany ! !t$$ #peratn- under chapter ++' any nc#&e' e/pen!e!' -an!' and $#!!e! due t# the re#r-an.at#n "$$ be acc#unted %#r n the nc#&e) The!e nc#&e !tate&ent te&! !h#u$d be rep#rted !eparate$y a! a re#r-an.at#n te&! e/cept the #ne! that !h#u$d be rep#rted a! d!c#ntnued #perat#n!) Ca!h %$#"! re$ated t# the re#r-an.at#n are a$!# t# be d!c$#!ed !eparate$y n the ca!h %$#" !tate&ent u!n- a drect ð#d a! a rec#&&endat#n)

16

re!h !tart rep#rtn- !h#u$d be u!ed by a c#&pany e&er-n- %r#& Chapter ++ % the %#$$#"n- t"# c#ndt#n! are &et2 3+4 the re#r-an.at#n ,a$ue #% the a!!et! #% the e&er-n- entty &&edate$y be%#re the date #% c#n%r&at#n #% the re#r-an.at#n p$an ! $e!! than the t#ta$ #% a$$ p#!tpett#n $ab$te! and a$$#"ed c$a&! and 34 h#$der! #% e/!tn- ,#tn- !hare! &&edate$y be%#re c#n%r&at#n #% the re#r-an.at#n p$an rece,e $e!! than ?: percent #% the ,#tn- !hare! #% the e&er-n- entty)

17

Entte! n#t (ua$%yn- %#r %re!h !tart rep#rtn- rep#rt $ab$te! c#&pr#&!ed by a c#n%r&ed re#r-an.at#n p$an n a &anner !&$ar t# that #% a n#te !!ued n a n#nca!h tran!act#n under AS0 ASC <8?) #r-,ene!! #% debt !h#u$d be rep#rted a! an e/tra#rdnary te&)

Copyright © 2015 Pearson Education Limited

Chapter 18

18-3

SOLUTIONS TO EXERCISES Solution E18-1 b 1 d 2 c 3 d 4

Solution 18-2 a 1 d 2 c 3 d 4

Solution E18-3

Total Foley Ltd. ssets a!ailable "or secured creditors# Plant assets $25%000 • •

ccounts recei!able

•

&ther current assets $ 5%000 (otes payable to ban) and creditors *$20%000 + $15%000,

•

$15%000

Total a!ailable "or priority and unsecured creditors Less# priority liabilities to employees Total a!ailable "or unsecured creditors *i.e. suppliers,


$'5%000 *$-5%000, $10%000 *$5%000, $5%000


18- 4

Solution E18-4

Partially secured bonds payable mount secured by 50 o" plant assets reali/ation *50  $500%000, nsecured portion o" bonds payable

$-50%000 *$250%000, $100%000

Total a!ailable portion o" adeline 34s plant assets reali/ation "or unsecured creditors $ 250%000 Total claim o" unsecured creditors *$250%00010,

$2%500%000

Epected payment "or the bonds payable unsecured portion# 6 *

6 * 6

 total a!ailable assets "or unsecured creditors,

 $250%000, $10%000

Total epected payment "or the bond payable *$250%000 + $10%000,


$270%000

Chapter 18

18-5

Solution E18-5

Post8petition liabilities llo9ed claim sub:ect to compromise Total liabilities Less# ;eorgani/ation !alue< Ecess liabilities o!er reorgani/ation !alue

$

100%000 1%000%000 $1%100%000 * =50%000, $ 150%000

*Reorganization alue

Postpetition liabilities Taes payable Current portion o" senior debt 3enior debt% 11 bonds 3ubordinate debt Common stoc)

$

100%000 50%000

% cash payable 250%000 100%000 '00%000 $ =50%000

50%000

>a!ing the abo!e% ?on 3 met the t9o conditions "or a "resh8start reporting% gi!en that# 1. The ecess liabilities o!er reorgani/ation !alue indicate that the "irst condition o" "resh8start reporting is met. 2. The reorgani/ation plan calls "or the old e@uity holders o" $-00%000 common stoc) to retain $100%000 ne9 common stoc)s o" the reorgani/ed entity. This sho9s that ?on 3 stoc)holders o9n less than 50 per cent o" the emerging company. There"ore the second condition is also met.

SOLUTIONS TO !RO"LE#S Solution !18-1 $In t%ou&an'&(

llo9ed claim sub:ect to compromise Total liabilities Less# ;eorgani/ation !alue< Ecess liabilities o!er reorgani/ation !alue

1%500 $1%500 *1%250, $ 250

*Reorganization alue

Taes payable

$100

Current portion o" senior debt% cash payable 3enior debt% 12 bonds 3ubordinate debt Common stoc)

50 150 -00 750 $1%250

>a!ing the abo!e calculations% Tessa Ltd. met the t9o conditions "or a "resh8 start reporting% gi!en that# Copyright © 2015 Pearson Education Limited


18- 6

1. The ecess liabilities o!er reorgani/ation !alue indicate that the "irst condition o" "resh8start reporting is met. 2. The reorgani/ation plan calls "or the old e@uity holders o" $=00 common stoc) to retain $250 ne9 common stoc)s o" the reorgani/ed entity. This sho9s that ?on 3 stoc)holders o9n less than 50 per cent o" the emerging company. There"ore the second condition is also met.

Solution !18-2 1

mount epected to be a!ailable "or unsecured claims# Total amount epected to be a!ailable "or all claims Less# Payments to secured and priority claims ortgage payable (ote payable Priority claims

$''5%000

$220%000 A5%000 B0%000

Epected to be a!ailable "or unsecured nonpriority claims 2

-A5%000

$ A0%000

Epected reco!ery per dollar o" unsecured claims# Epected to be a!ailable *"rom 1, 6 $A0%000 nsecured claims *$550%000 8 $-A5%000, 6 $1A5%000 Epected reco!ery on the dollar# $A0%000$1A5%000 6 $.'0

3

Epected reco!ery by class o" creditors# Fully secured  mortgage payable Partially secured  note payable $A5%000 + *$25%000 × $.'0, Priority unsecured  liabilities to priority creditors nsecured nonpriority creditors  accounts payable *$150%000 × $.'0,

$220%000 B5%000 B0%000

Total

$''5%000


70%000

Chapter 18

18-7

Solution !18-3 1

;an)ing o" claims# Fully secured:

B.

>olders o" "irst mortgage and related interest

$22B%500

Unsecured priority:

1. 7.

dministrati!e epenses ages payable up to $11%A25 per employee*$'B%000 D *$12%2A5 8 $11%A25,, A. Customer claims "or merchandise paid "or and not deli!ered *maimum $2%700 per indi!idual, 5. 3tate go!ernment "or gross receipts taes $ -%000 -. Local go!ernment "or property taes '%000 Total unsecured priority claims

$ 12%500

'A%'50

1%500

A%000 7B%'50

Unsecured nonpriority:

2. '. 7.

erchandise creditors Local ban) "or principal o" loan President "or salary due o!er $11%A25 '. nterest on unsecured ban) loan Total unsecured nonpriority claims

$==%000 -0%000 550

Total all claims 2

12=%550 '%500 1-'%050 $'-1%000

?istribution o" a!ailable cash# 1st ortgage holders *100,

$22B%500

2nd

dministrati!e epenses *100,

12%500

-rd

Employees *up to $11%A25 each, *100,

'A%'50

'th

Customers "or merchandise not deli!ered *100,

5th

3tate go!ernment *100, Local go!ernment *100,

1%500 $ -%000 '%000

A%000

;emaining cash *$-A'%500 8 $2=7%=50, o" $AA%550$12=%550 claim o" net ran) 6 $.5=B7 return on dollarG 7th

erchandise creditors *$==%000 × .5=B7, Local ban) "or loan principal *$-0%000 × .5=B7, Company president *$550 × .5=B7, Total distributed *e@ual to a!ailable cash, <;ounding errorH should be $-A'%500.

$5=%271 1A%=5B -2=


AA%5'B $-A'%'=B<


18- 8

Solution !18-4 $In T%ou&an'&(

1) !O! INC) STTE#ENT O+ ++IRS !o, In) State.ent o/ //air& on ugu&t 10 214 &&et&

Ioo) Jalue

Estimated ;eali/able Jalues Less 3ecured Creditor Liabilities

Estimated ;eali/able Jalue !ailable "or nsecured Creditors

Pledged for secured creditors

$AA5

Fied ssets 8 net Less# Iond payable

$'A5 *500, $0

Available for priority and unsecured creditors

250 150 200

KKKKKK $1%-A5

Cash and e@ui!alents ccounts recei!able n!entories Total a!ailable "or priority and unsecured creditors Less# Priority liabilities Total a!ailable "or unsecured creditors Estimated de"iciency

250 125 100 'A5 *150, -25 25 $-50

Liailitie& an' Sto%ol'er& Euit6

Ioo) Jalue

3ecured and Priority Claims

nsecured (on8 priority Claims

Fully secured creditors

$500

Iond payable Less# "ied assets pledged as security

$500 *'A5,

$25

Priority liabilities

150

ages payable

150 750

Unsecured creditors

200 125

ccount payable nterest payable

$200 125

Stockholders’ equity

550 *150, $1%-A5

Common stoc) ;etained earnings Total unsecured non8priority claims

2) ESTI#TE7 !#ENTS !ER 7OLLR TO EC9 CLSS O+ CLI#S:


KKKKKK $-50

Chapter 18

18-9

Cash !ailable

$=50

?istribution to partially secured and priority creditors# Iond payable *secured portion, $'A5 dministrati!e epense 250 ages payable 150

BA5

!ailable to unsecured non8priority creditors *,

$A5

nsecured non8priority creditors# ccount payable Iond payable *unsecured portion, nterests payable Total unsecured non8priority claims *I,

200 25 125 $-50

Per dollar pro rata distribution "or unsecured non8priority creditors# I 6 $A5$-50 6 $0.21

a) !a6.ent& /or ,artiall6 &eure' la&&

Iond payable *secured portion, Iond payable *unsecured portion, $0.21$25

$'A5 5.25 $'B0.25

) !a6.ent& /or un&eure' ,riorit6 la&&

dministrati!e epense ages payable Total unsecured priority class payment

$250 150 $'00

) !a6.ent& /or un&eure' non-,riorit6 la&&

ccount payable *$0.21$200, nterests payable *$0.21$125, Total unsecured non8priority payment

'2 27.25 $7B.25



18- 10

Solution !18-4 *continued, 2

Estimated payments per dollar "or unsecured creditors Cash a!ailable

$77%200

?istribution to partially secured and unsecured priority creditors# (ote payable and interest dministrati!e epenses ages payable

$2B%000 '%000 12%000

!ailable to unsecured nonpriority creditors 6 

''%000

$22%200

(ote payable and interest *unsecured portion, ccounts payable ;ent payable

$ -%000 27%'00 A%700

nsecured nonpriority claims 6 I

$-A%000

I 6 $22%200$-A%000 6 $.70 per dollar E;,ete' reo
(ote payable and interest 3ecured portion nsecured portion *$-%000

$.70,

×

$2B%000 1%B00

$2=%B00

$ '%000 12%000

17%000

$15%B'0 '%570

20%'00

Unsecured priority

dministrati!e epenses ages payable Unsecured nonpriority

ccounts payable *$27%'00 × $.70, ;ent payable *$A%700 × $.70, Total payments


$77%200

Chapter 18

18-11

Solution !18-5 7a=n Cor,oration  in C%a,ter > 3tatement o" ""airs at uly 10% 2011

1

Assets

;eali/able Jalue8 Liability &""sets

Ioo) Jalue

;eali/able Jalue !ailable "or nsecured

Fully secured

$210%000

ccounts recei!able  net Less# (otes payable

$170%000 100%000

$ 70%000

Partially secured

250%000

Land and buildings  net Less# ortgage and interest payable

$1'0%000 205%000

0

Unsecured

B0%000 200%000 150%000 10%000

Cash n!entories E@uipment  net ntangible assets !ailable "or priority and unsecured Priority liabilities !ailable "or nonpriority unsecured Estimated de"iciency

B0%000 210%000 70%000 0 '10%000 150%000 270%000 155%000 $'15%000

$=00%000 Equities


Ioo) Jalue

nsecured8 (onpriority Claims


$ 50%000 2'%000 A7%000

ccounts payable ages payable Taes payable

$ 50%000 2'%000 A7%000 150%000

Fully secured

100%000

(ote payable Less# ccounts recei!able  net

205%000

ortgage and interest payable Less# Land and buildings  net

$100%000 170%000 *70%000,

Partially secured

$205%000 1'0%000 75%000

$ 75%000

Unsecured

-50%000 -00%000 *205%000, $=00%000

ccounts payable Capital stoc) ;etained earnings de"icit


-50%000 KKKKKKKKK $'15%000


18- 12

Solution !18-5 *continued,

Claims by Priority ;an)s

2

mounts to mounts to Ie Ie Paid ritten &""

Priority claims

dministrati!e epenses ccounts payable ages payable Taes payable

$ 11%000 50%000 2'%000 A7%000

$ 11%000 50%000 2'%000 A7%000

100%000

100%000

205%000

1'0%000 -=%000

$ 27%000

-50%000 $B17%000

210%000 $750%000

1'0%000 $177%000

Fully secured claims

(ote payable Partially secured claims

ortgage and interest payable Unsecured

ccounts payable

Calculation o" reco!ery "or unsecured nonpriority claims Cash a!ailable Less# Paid to priority claims Less# Paid to "ully secured claims Less# Paid to partially secured creditors = secured portion 

Cash a!ailable "or unsecured

$750%000 *171%000, *100%000, *1'0%000, $2'=%000

nsecured claims# Partially secured *$205%000 8 $1'0%000 secured, ccounts payable  nonpriority

$ 75%000 -50%000

I

$'15%000



Total unsecured claims I 6 $2'=%000$'15%000 6 $.70 reco!ery on the dollar

÷


Chapter 18

18-13

Solution !18-? 1

E
3tatement o" ""airs on une -0% 2011 Assets

;eali/able Jalues8 ;eali/able Liability Jalue &""sets "or !ailable "or 3ecured nsecured Creditors Creditors

Ioo) Jalue Pledged for fully secured creditors

$2-0%000

Land and building Less# ortgage payable and accrued interest

$1A0%000 *175%000,

$

5%000

Available for priority and unsecured creditors

'0%000 A0%000 50%000 70%000 50%000

Cash ccounts recei!able  net n!entories achinery  net Mood9ill Total a!ailable "or priority and unsecured Creditors Less# Priority liabilities Total a!ailable "or unsecured creditors Estimated de"iciency

$500%000

'0%000 7-%000 '2%000 20%000 0 1A0%000 A0%000 100%000 75%000 $175%000

iabilities and Stockholders’ Equity


Ioo) Jalue

nsecured (on8priority Claims


$ 70%000 10%000

ages payable Property taes payable

$ 70%000 10%000 A0%000

Fully secured creditors

150%000 15%000

ortgage payable nterest on mortgage payable

$150%000 15%000 175%000

Unsecured creditors

110%000 50%000 5%000

ccounts payable (ote payable  unsecured nterest payable  unsecured

2 00%000 *100%000,

Capital stoc) ;etained earnings *de"icit,

$110%000 50%000 5%000

Stockholders’ equity

KKKKKKKK $175%000

$500%000


18- 14

2


3ettlement per dollar o" ran) 1 unsecured creditors is $.7250 *$100%000 a!ailable "or unsecured$170%000 accounts and notes payable,. (o payment is made "or the $5%000 unsecured interest claim.


Chapter 18

18-15

Solution !18-> 1

The reorgani/ation is eligible "or "resh start accounting because the liabilities on une -0% 2011 o" $17%500 eceed the reorgani/ation !alue o" $17%000 by $500. lso% the common stoc) o" the ne9 entity is allocated $5%000 to prepetition creditors and $2%000 to Lo9step4s old stoc)holders% so that the old stoc)holders ha!e less than a 50 percent interest in the ne9 entity.

2

Entries to ad:ust Lo9step4s accounts "or the reorgani/ation plan# Prepetition liabilities $12%500 ccounts payable *old, $ B00 ages payable *old, '00 (ote payable *ne9, -%B00 Common stoc) *ne9, 5%000 Main on debt restructuring 2%500 To ad:ust prepetition liabilities to con"orm 9ith the plan. Loss on asset ad:ustments to "air !alues n!entories Land Iuildings  net Patent To ad:ust assets to their "air !alues.

$ '%000 '00 1%000

Common stoc) *old, Common stoc) *ne9, dditional paid8in capital To record echange o" common stoc).

$ A%000

$1%'00 '%000

Main on debt discharge $ dditional paid8in capital ;eorgani/ation !alue in ecess o" "air !alue Loss on asset ad:ustments to "air !alues ?e"icit To eliminate de"icit and record adoption o"

$2%000 5%000

2%500 5%000 1%000 $'%000 '%500 "resh start reporting.



18- 16

Solution !18->*continued, 3

Lo=&te, Cor,oration

Final Ialance 3heet as o" uly B% 2011 Assets

Cash Trade recei!ables  net n!entories Land Iuildings  net E@uipment  net ;eorgani/ation !alue in ecess o" "air !alues Total assets

$ 7%A00 1%000 2%000 2%000 1%500 1%B00 1%000 $17%000

iabilities and Stockholders’ Equity

ccounts payable ccounts payable *old, ages payable ages payable *old, (otes payable *ne9, Total liabilities Common stoc) *ne9, Total liabilities and stoc)holders4 e@uity

$ -%000 B00 1%000 '00 -%B00 =%000 A%000 $17%000

(ote# The "inal balance sheet o" Lo9step Corporation 9ill be the same as the beginning balance sheet o" >ighstep Corporation.


ch18_Beams12ge_SM.doc

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