Chapter 20 – Corporations in Financial Difficulty
E20-2 (continued)
b.
Journal entries to record reorganization:
(1)
Accounts Payable
80,000
Notes Payable, 10%
150,000
Interest Payable
40,000
Cash
Accounts Receivable (net)
Land
Gain on Disposal of Land
Gain on Discharge of Debt
Record discharge of debt.
(2)
Common Stock ($1 par)
100,000
Additional Paid-In Capital
171,000
Gain on Disposal of Land
40,000
Gain on Discharge of Debt
67,000
Common Stock ($2 par)
Retained Earnings
Record change in par value of stock and elimination of deficit.
E20-3 Multiple-Choice Questions on Chapter
7 Liquidations
1.
b –
The amount of wages cannot exceed $10,000.
2.
a –
These costs have the highest priority of all unsecured claims.
(b) incorrect. These are the sixth priority.
(c) incorrect. These are the third priority.
(d) incorrect. These are treated as regular employees, third priority.
3.
d –
costs of filing the involuntary petition and appointment of trustees has the highest
priority of all unsecured claims.
(a) incorrect. Administrative expenses have first claim.
(b) incorrect. Employee wages have a higher priority than governmental units.
(c) incorrect. Administrative expenses have first claim.
4.
a –
3 or more creditors are required to file the petition.
(b) incorrect. There are 2 requirements, (1) the debtor is generally not paying
debts as they become due or within the last 120 days has had a custodian
appointed by other creditors, by the debtor, or by some other agency to take
possession of the debtor’s assets. (2) if more than 12 creditors exist, 3 or more
must combine to file the petition, and these must have aggregate unsecured
claims of at least $5,000.
(c) incorrect. See answer to B.
(d) incorrect. See answer to B.
5.
c –
A transaction of the type is voidable. The money will be returned to the debtor and
paid according to priority.
(a) incorrect. The debtor must meet all the demands of his creditors according to
priority until funds run out.
(b) incorrect. Insolvency is a required disclosure regardless of the expected time
period.
(d) incorrect. Debtors are allowed to file a voluntary petition for bankruptcy, it is
called a voluntary petition.
E20-4 Chapter 7 Liquidation
a.
Schedule to calculate amount available for general unsecured creditors:
Total estimated fair values
$471,000
Claims of secured creditors:
Notes payable and interest
(Receivables and Inventory)
$115,000
Bonds payable and interest
(Land and Building)
231,000
(346,000)
$125,000
Claims of creditors with priority:
Wages payable
$ 9,500
Taxes payable
14,000
(23,500)
Available to general unsecured creditors
$101,500
b.
Accounts payable
$ 95,000
Notes payable and interest
$195,000
Less: Secured by receivables and inventory
(115,000)
80,000
Total unsecured claims
$175,000
Estimated dividend:
$101,500
= 58%
$175,000
c.
Group
Credit
Percentage
Distributed
Accounts Payable
$ 95,000
58%
$ 55,100
Wages Payable
9,500
100
9,500
Taxes Payable
14,000
100
14,000
Notes Payable
80,000
58
46,400
and Interest
115,000
100
115,000
Bonds Payable
and Interest
231,000
100
231,000
$471,000
E20-5 Statement of Realization and Liquidation
Pace Corporation
Statement of Realization and Liquidation
Assets
Assets to be Realized
Assets Realized
Old Receivables, net
$ 38,000
Old Receivables
$ 21,000
Marketable Securities
12,000
New Receivables
47,000
Old Inventory
60,000
Marketable Securities
10,500
Depreciable Assets, net
96,000
Sales of Inventory
75,000
Assets Acquired
Assets Not Realized
New Receivables
75,000
Old Receivables, net
17,000
New Receivables, net
28,000
Depreciable Assets
80,000
Supplementary Items
Supplementary Charges
Supplementary Credits
Trustee’s Fee
$ 4,300
Net Loss
$ 6,800
Liabilities
Liabilities Liquidated
Liabilities to be Liquidated
Old Current Payables
$ 22,000
Old Current Payables
$ 48,000
Liabilities Not Liquidated
Liabilities Incurred
Old Current Payables
26,000
$333,300
$333,300
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P20-6 Chapter 11 Reorganization
a.
Recovery analysis for plan of reorganization:
Polydorous Corporation
Plan of Reorganization
Recovery Analysis
Recovery
Pre-
Confirmation
Elimination
of Debt
and Equity
Surviving
Debt
Cash
12%
Secured
Notes
Common
%
Stock
Value
Total
$
Recovery
%
Post-petition liabilities
(10,000)
(10,000)
(10,000)
100%
Claims/Interest:
Accounts Payable
(160,000)
20,000
(40,000)
(100,000)
(140,000)
88
Interest Payable
(20,000)
10,000
(10,000)
(10,000)
50
Notes Payable, 10%
(340,000)
60,000
(10,000)
(240,000)
30
(30,000)
(280,000)
82
Total
(520,000)
90,000
Preferred Shareholders
(100,000)
50,000
50
(50,000)
(50,000)
Common Shareholders
(150,000)
130,000
20
(20,000)
(20,000)
Retained Earnings Deficit
80,000
(80,000)
Total
(700,000)
190,000
(10,000)
(60,000)
(340,000)
100%
(100,000)
510,000
Pre-confirmation total equities of $700,000 includes $690,000 pre-petition and $10,000 post-petition increase.
Note: Parentheses indicate credit amount.
P20-6 (continued)
b.
Analysis for evaluating qualifications for fresh start accounting:
First condition:
Post-petition liabilities
$ 10,000
Liabilities deferred pursuant to Chapter 11 proceedings
520,000
Total post-petition liabilities and allowed claims
$530,000
Reorganization value
(510,000)
Excess of liabilities over reorganization value
$ 20,000
Second condition:
Holders of existing voting shares immediately before confirmation receive 20%
of voting shares of emerging entity.
Therefore, both conditions for a fresh start occur, and fresh start accounting is
used to account for the company.
c.
Entries for execution of plan of reorganization:
(1)
Liabilities Subject to Compromise
520,000
Cash
60,000
Notes Payable, 12%, secured
340,000
Common Stock (new)
30,000
Gain on Debt Discharge
90,000
Record debt discharge.
(2)
Preferred Stock
100,000
Common Stock (old)
150,000
Common Stock (new)
70,000
Additional Paid-In Capital
180,000
Record exchange of stock for stock.
(3)
Reorganization Value in Excess of Amounts
Allocable to Identifiable Assets
30,000
Gain on Debt Discharge
90,000
Additional Paid-In Capital
180,000
Accounts Receivable (net)
30,000
Inventory
7,000
Property, Plant, and Equipment
183,000
Retained Earnings – Deficit
80,000
Record fresh start accounting and eliminate deficit.
P20-6 (continued)
Schedule to support allocation of reorganization value:
Book
Fair
Value
Value
Difference
Cash
$ 30,000
$ 30,000
$ -0-
Accounts Receivable (net)
140,000
110,000
(30,000)
Inventory
25,000
18,000
(7,000)
Property, Plant, and
Equipment (net)
445,000
262,000
(183,000)
Reorganization Value in Excess
of Amounts Allocable to
Identifiable Assets
-0-
30,000
30,000
Total
$640,000
$450,000
$(190,000)
Note:
The post-reorganization total fair value is the reorganization value of
$510,000 less the $60,000 paid to fulfill the plan of reorganization.
P20-6 (continued)
d. Fresh start balance sheet worksheet for company emerging from reorganization:
(Worksheet not required)
Pre-confirmation
Adjustments to Record
Confirmation of Plan
Company’s
Reorganized
Balance
Sheet
Debt
Exchange
Fresh
Discharge
of Stock
Start
Assets:
Cash
90,000
(60,000)
30,000
Accounts Receivable (net)
140,000
(30,000)
110,000
Inventory
25,000
(7,000)
18,000
255,000
(60,000)
-0-
(37,000)
158,000
Property, Plant,
and Equipment (net)
445,000
(183,000)
262,000
Reorganization Value In
Excess of Amounts
Allocable to
Identifiable Assets
30,000
30,000
Total Assets
700,000
(60,000)
-0-
(190,000)
450,000
Liabilities:
Liabilities Not Subject
to Compromise:
Current Liabilities
(10,000)
(10,000)
Liabilities Subject
to Compromise
(520,000)
520,000
Notes Payable, 12%, secured
(340,000)
(340,000)
Total Liabilities
(530,000)
180,000
-0-
-0-
(350,000)
Shareholders’ Equity:
Preferred Stock
(100,000)
100,000
Common Stock (old)
(150,000)
150,000
Common Stock (new)
(30,000)
(70,000)
(100,000)
Additional Paid-In Capital
(180,000)
180,000
Retained Earnings
80,000
(90,000)
90,000
(80,000)
-0-
Total Shareholders‘ Equity
(170,000)
(120,000)
-0-
190,000
(100,000)
Total Liabilities and
Shareholders’ Equity
(700,000)
60,000
-0-
190,000
(450,000)
Note: Parentheses indicate credit amount.
P20-6 (continued)
d. Balance sheet for company emerging from Chapter 11 reorganization with fresh start
accounting:
Polydorous Company
Balance Sheet
Emerging Date
Assets:
Cash
$ 30,000
Accounts Receivable (net)
110,000
Inventory
18,000
Total Current Assets
$158,000
Property, Plant, and Equipment (net)
262,000
Reorganization Value In Excess of Amounts
Allocable to Identifiable Assets
30,000
Total Assets
$450,000
Liabilities:
Accounts Payable
$ 10,000
Notes Payable, 12%, secured
340,000
Total Liabilities
$350,000
Shareholders’ Equity:
Common Stock
100,000
Total Shareholders‘ Equity
$100,000
Total Liabilities and Shareholders’ Equity
$450,000