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51.(30 Minutes) (Prepare Journal entries for company emerging from bankruptcy
using fresh start accounting)
Holmes Corporation must use fresh start accounting because the
reorganization value of $225,000 is less than the company's allowed debts and
the original owners hold less than 50 percent of the voting stock after the
reorganization.
BOOK VALUES AFTER EMERGING FROM REORGANIZATION
— Total assets = $248,200 ($225,000 reorganization value plus proceeds from
sale of stock of $36,000 less $12,800 payment made to settle unsecured
liabilities [20 percent of $64,000])
JOURNAL ENTRIES
— Goodwill ...................................................................... 15,000
Additional Paid-In Capital .................................... 15,000
To adjust to total reorganization value as part of fresh
start accounting ($225,000 – $210,000).
— Salary Payable ............................................................ 18,000
Note Payable—1 year ........................................... 18,000
To record note issued for accrued salaries.
Gain on Discharge of Debt ................................... 51,200
To record payment of unsecured debts—20% payment
made.
— Gain on Debt Discharge ............................................. 130,200
Additional Paid-In Capital ($27,000 – $25,200) ........ 1,800
Develop Your Skills
Research Case 1
This case allows the student to review the official information provided by the
Securities and Exchange Commission in connection with bankrupt organizations,
as well as gain information about reporting requirements for organizations in
bankruptcies. In addition, this assignment allows the student to see how the SEC
attempts to educate the public on matters pertaining to financial investing.
This site includes a significant amount of general information including the
following:
The differences between a Chapter 7 and a Chapter 11 bankruptcy.
The risks incurred by the various parties.
A description of a prepackaged bankruptcy plan.
Research Case 2
This assignment provides the student with the chance to work with actual data
from a real company. Thus, students get a feel for the process of retrieving
information of interest about a company that is going through bankruptcy. In
require slow and meticulous study.
Here is the actual note – parts (a) and (b) -- as supplied by the company. This
information can serve as the basis for considerable class discussion.
(a) Plan of Reorganization
On April 30, 2010 (the ‘‘Effective Date’’), the Bankruptcy Court entered an order
confirming the Debtors’ Modified Fourth Amended Joint Plan of Reorganization
(the ‘‘Plan’’) and the Debtors emerged from Chapter 11 by consummating their
restructuring through a series of transactions contemplated by the Plan including
the following:
• Name Change. On the Effective Date, but after the Plan became effective and
prior to the distribution of securities under the Plan, SFI changed its corporate
name to Six Flags Entertainment Corporation. As used herein, unless the context
• Common Stock. Pursuant to the Plan, all of SFI’s common stock, preferred stock
purchase rights, preferred income equity redeemable shares (‘‘PIERS’’) and any
On the Effective Date, Holdings issued an aggregate of 54,777,778 shares of
common stock at $0.025 par value as follows: (i) 5,203,888 shares of common
stock to the holders of unsecured claims against SFI, (ii) 4,724,618 shares of
6,798,012 shares of common stock in an offering to certain purchasers for an
aggregate purchase price of $75.0 million, (v) 3,399,006 shares of common stock
in an offering to certain purchasers for an aggregate purchase price of $50.0
On June 21, 2010, the common stock commenced trading on the New York Stock
Exchange under the symbol ‘‘SIX.’’
• Prepetition Indebtedness. Pursuant to the Plan and on the Effective Date, all
outstanding obligations under notes issued by SFI and SFO (collectively, the
‘‘Prepetition Notes’’) were cancelled and the indentures governing such
obligations were cancelled, except to the extent to allow the Debtors,
Pursuant to the Plan and on the Effective Date, the Second Amended and
Restated Credit Agreement, dated as of May 25, 2007 (as amended, modified or
otherwise supplemented from time to time, the ‘‘Prepetition Credit Agreement’’),
allowing the Administrative Agent to exercise certain rights).
• Financing at Emergence. On the Effective Date, we entered into two exit
financing facilities: (i) an $890.0 million senior secured first lien credit facility
comprised of a $120.0 million revolving loan facility, which could have been
See Note 8 for a discussion of the terms and conditions of these facilities and
subsequent amendments, early repayments, and terminations from debt
extinguishment transactions.
• Fresh Start Accounting. As required by accounting principles generally
accepted in the United States (‘‘GAAP’’), we adopted fresh start accounting
effective May 1, 2010 following the guidance of Financial Accounting Standards
The implementation of the Plan and the application of fresh start accounting
results in financial statements that are not comparable to financial statements in
As used herein, ‘‘Successor’’ refers to the Company as of the Effective Date and
‘‘Predecessor’’ refers to SFI together with its consolidated subsidiaries prior to
the Effective Date.
(b) Fresh Start Accounting and the Effects of the Plan
Fresh start accounting results in a new basis of accounting and reflects the
allocation of the Company’s estimated fair value to its underlying assets and
liabilities. The Company’s estimates of fair value are inherently subject to
Fresh start accounting provides, among other things, for a determination of the
value to be assigned to the equity of the emerging company as of a date selected
for financial reporting purposes, which for the Company is April 30, 2010, the date
that the Debtors emerged from Chapter 11. The Plan required the contribution of
equity from the creditors representing the unsecured senior noteholders of SFI,
of which $555.5 million was raised at a price of $14.71 per share, as adjusted to
reflect the June 2011 two-for-one stock split described in Note 12. Holdings also
capital expenditures and the discount rate utilized.
The four-column consolidated statement of financial position as of April 30, 2010
(see below) reflects the implementation of the Plan. Reorganization adjustments
have been recorded within the condensed consolidated balance sheets as of April
30, 2010 to reflect effects of the Plan, including discharge of liabilities subject to
compromise and the adoption of fresh start accounting in accordance with FASB
ASC 852. The reorganization value of the Company of approximately $2.3 billion
was based on the equity value of equity raised plus new indebtedness and fair
value of Partnership Parks ‘‘put’’obligations as follows (in thousands):
Equity value based on equity raised(1) . . . . . . . . . . . . . . . . . . . . . . . . . $ 805,791
Add: Redeemable noncontrolling interests(2) . . . . . . . . . . . . . . . . . . 446,449
Add: Exit First Lien Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 770,000
Add: Exit Second Lien Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250,000
_______________________
(1) Equity balance is calculated based on 54,777,778 shares of Holdings common
stock at the price of $14.71 per share pursuant to the Plan, as adjusted to reflect
the June 2011 two-for-one stock split described in Note 12.
the annual guaranteed minimum distributions to the holders of the ‘‘put’’ rights
and a discount rate of 7%.
_______________________
Under fresh start accounting, the total Company value is adjusted to
reorganization value and is allocated to our assets and liabilities based on their
respective fair values in conformity with the purchase method of accounting for
business combinations in FASB ASC Topic 805, Business Combination (‘‘FASB
ASC 805’’). The excess of reorganization value over the fair value of tangible and
comprehensive loss were eliminated.
The valuations required to determine the fair value of the Company’s assets as
presented below represent the results of valuation procedures performed by
SIX FLAGS ENTERTAINMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
April 30, 2010
Reorganization Fresh Start
Predecessor Adjustments(1) Adjustments(2) Successor
ASSETS
Current assets:
Cash and cash
Debt issuance costs . . . . . . . . 11,817 28,184 — 40,001
Restricted-use
investment securities . . . . . . .2,753 — — 2,753
Deposits and other assets . . . 97,677 — 6,643 104,320
Total other assets . . . . . . . . . 112,247 28,184 6,643 147,074
Property and equipment,
at cost, net . . . . . 1,507,677 — (78,304) 1,429,373
Total assets . . . . . . . . . . . $2,888,442 $ (2,892) $ (75,684) $2,809,866
LIABILITIES and EQUITY (DEFICIT)
Liabilities not subject to compromise:
Current liabilities:
Accounts payable . . . . . . . $ 92,198 $ (20,272) $ — $71,926
Other accrued liabilities . . . . .52,753 2,883 1,438 57,074
Deferred income . . . . . . . . . . .61,033 — (1,324) 59,709
Liabilities from discontinued
operations . . 5,409 — — 5,409
Current portion of long-term
Deferred income taxes . . . . .118,821 — 110,955 229,776
Total liabilities not subject
to compromise . . . . . . . . 1,606,863 (151,024) 96,568 1,552,407
Liabilities subject to
compromise . . . . . . . . . . 1,745,175 (1,745,175) — —
value . . . . . . . . — — — —
New common stock . . . . . . . . . . . — 685 — 685
Old common stock . . . . . . . . . 2,458 (2,458) — —
Capital in excess of
par value . . . . . . . . . 1,508,155 (703,049) — 805,106
Noncontrolling interests . . . . . 5,092 — 127 5,219
Total (deficit) equity . . . . . . .(819,529) 1,893,307 (262,768) 811,010
Total liabilities and
equity (deficit) . . . . $ 2,888,442 $ (2,892) $ (75,684) $2,809,866
_________________
common stock.
The Plan’s impact resulted in a net decrease of $21.3 million in cash and cash
equivalents. The significant sources and uses of cash were as follows (in
thousands):
Sources:
Net amount borrowed under the Exit First Lien Term Loan . . . . . . . . . $ 762,300
Net amount borrowed under the Exit Second Lien Loan Facility . . . . . . 246,250
Uses:
Repayments of amounts owed:
Prepetition Credit Agreement—long term portion of term loan . . . . . 818,125
2016 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330,500
Prepetition Credit Agreement—revolving portion . . . . . . . . . . . . . . . . 270,269
Payments:
Exit Facilities’ debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,700
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,950
The gain on the cancellation of liabilities subject to compromise, before income
taxes, was calculated as follows:
Extinguishment of the 2010 Notes, 2013 Notes, 2014 Notes and 2015
Notes (collectively, the ‘‘SFI Senior Notes’’) . . . . . . . . . . . . . . . . . . .$ 868,305
Extinguishment of the PIERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306,650
Write-off of the accrued interest on the SFI Senior Notes . . . . . . . . . . . 29,868
Write-off debt issuance costs on the Prepetition Credit Agreement
compromise, before income taxes . . . . . . . . . . . . . . . . . . . . . .$1,087,516
