Page |1 Chapter 5 lation & Reorganization Corporate Liq PROBLEM 1: TRUE OR FALSE 1, TRUE - see solution below 2. TRUE “Total assets @ realizable value (200 x 75%) 150 Total priority claims (300 x %4) 3) Net free assets 75 “Total non-priority claims (00 x 3/4) 25 Estimated recovery of non-priority TJ 3. FALSE (40 asset @ carrying amt. x 75%) ~ 30 realizable value; > 30 realizable value vs. 36 loan ~ loan is partially secured; % 30secured + (6% 33.33% see computation above) = 32 4. FALSE » (20 asset @ carrying amt. x 75%) = 15 realizable value; > 15realizable value vs. 15 note = note is fully securect Mr. B can expect full payment of the note ‘TRUE - shareholders are paid last; if the unsecured non- priority creditors can only expect to recover 1/3 of their claims, the shareholders will recover nothing, ROBLEM 2: MULTIPLE CHOICE - THEORY Pi 1 2 3D 4. 5. PROBLEM 3: EXERCISE 1. Solutions:Page | Requirement (a): Statement of affairs aioe ook sates ASSETS ‘secure fare aoe somo “tant and ing Sevan Loan pale ann) inne pyle eum) tame Act page partner cepa “Taipment net “an Fre eet som Ge sow 0m) Asma eae sao nano Noten 2a Ines cable 2s 60900 nvr snare Spm Tepid ess sua tal eancs zea a habe swith priory cen) 810000) Apne mac es Tina toy ees) ‘Smzawmaas Zr cone aT took vance ABILITIES AND Reale Seameriny ‘abe TTT _ Amica cores sao Sinica sam mia Carentan psble man Sa anced tates ony on py : - ly cel etre amo tao ple TROT Ine poe Ei . Pty seed eta sonecoNexepte sooo Cipro cama 200300 Page | evra expen eto 2.000 Scrum salaries need amon Rent poabe oman 22.2000 Telnet zea [30.10 Shareholders equity 0 EaRequirement (b): Estimated deficiency ZZZG00 (sce statement above) or (Alternative solution) ‘Total assets at realizable values 7,054,400 ‘Total liabilities at settlement amounts _ (7,832,000) Estimated deficiency (777,600). Requirement (c): Estimated recovery percentage Net free assets: Estimated recovery percentage Total unsecured of unsecured creditors without = oie Jowrli liabilities without priority Oo priority 1,814,400 = 2,592,000 = Z% Requirement (d): Mr. A’s recovery 500,000 x 70% = 350,0002. Solutions: Requirement (a): i. opening journal entry Ten. | Cash 80, 000 ‘ai | Accounts receivable 440, 000 Note receivable 200, 000 Inventory 1,060, 000 Prepaid assets 20,000 Land 1,000, 000 Building 4,000, 000 Equipment 600, 000 Estate deficit (squeeze) 342, 000 Accrued expenses 442,000 Current tax payable 700,000 Accounts payable 2,000, 000 Note payable 600,000 Loan payable 4,000, 000. i, journal entry for new assets and liabilities Tk] Tnterest receivable 20.000 sie Estate deficit 20,000 few | Estate deticit 30,000) al Interest payable 30,000 fii, compound jourmal entry forthe transactions jn] Cash 1, 486, 000% JiR. | Accrued expenses (xc slain nl) , St | Current tax payable 50,000 aust | Note payable 700,000 Loan payable 00,000 Interest payable 400,000 ‘Accounts receivable 30,000 | 440,000 Note receivable 200,000 Interest receivable 20,000 Inventory (1099435059 530,000 Prepaid assets 20,000 Land 1,000, 00, Building 0 Equipment 4,000, 00, Estate deficit (squeeze) 0 600,000 56,000 we 30K) = Mok = 56K = 1, 485,00 40K) + 20K + 180K) + 590K + 52M + 40K 50K — 700K - (M+Regquirement (0): Page [5 sna000 189000, aan 0000 5.20.00 ‘s.000 aa sun #2000 0000 2.00 00 ean.c00 4.000.080 252.0 Supplementary income: ASSETS Assets to be realized Assets realised: ‘Accounts receivable 44000 “Accounts cele Nate receivable 200M Nate renable Inventory SDK need resevable Prepaid assets 20400 Inventory [Land and building 5000000 Land sn building Equipment net O00 gwipment at Say tna! Assets async Assets mot realise merestecenable 2,0 ventory Liaticies Higuidated Liabites to be tguidate: Accrucdexpenses ——s}0n) Accrued expenses Current tx payable 70,090 Current x payable Avcrst payable soya Aecoansspajatle oon payable 4.00000 Note payable Note payable “Ho, a)_ Loan posable tal E200 tual Liabtiies not ignite ables assumed: Accracdespemes 382,000 Interet payable ‘Accounts payable 20.000 tal 232.00 Supplemortary expenses: ‘Adminitrative sium Tperses Netinduringthe 5 ay Requirement (ot cash Beg. bal. 80000] Assets 6,760,00 realized 0 50 566 0 Liabilities liquidated ‘Administrative 54000. expensesPage 16 Ce Requirement: state efi opening a0 see xm) ma iaiity ° On mewaset 00 on transactions 60 ann end see es or Gn OR timmy EO Acai ces a soa fated LoPROBLEM 4: MULTIPLE CHOICE - COMPUTATIONAL LA Siwiow et fre assets Estimated recavery percentage “otal unsecured of unsecured creditors without vient “aan at ibe vas aon IE nara rs wth pron ‘wa Vallee dios cura Ro aa pdge opty serosa Net fee assets “ae Diet: Tal secure cons w/o pry Unearth poy Lamon Deficiency of assets pledge! to partially secured edo cm) 250000 Total unsecured creditors without priority Ta Estimated recovery % of unsecured er. slo priority 2. C [300K realizable value of the asset pledged as security + [[@50K — 300) x 60%} = 510,000 3A Sion Cash 00900 Accounts receivable (600K x 6%) 360,00 Inventory (156M x 30%) 090 Land and building 23,00) quipment, net (AUK - 70K refsebishment) sane Taal ses rela ees SSN Accounts payable 157.00 Income tax payable (am. payable on tax amnesty) "0.000 Note payable an. Loan payable: 11200,000 Interest payable (0K + 70K) 0.000 timated liquidation costs 29.000 55; Phill¥eath & Pog 1BIG 160,000 Toa abilities @ expected net stiement amounts 430,00 Estimated deficiency (627,00) “Accounts payable @ book value 600.000 Discount’ 3,000) Waived (420,000) Accounts payable @ expected settlement amt, 1570ac Siidionw Cash ‘0000 Accounts receivable (00K x 60%) 300.00 Inventory (158M 50%.) 70.000 Land and building 2an,on Equipment, net (400K - 70K refurbishment) 30,000 Tol aces @ reine values sao Note & interest (realizable value of equpt) S000 Loan payable 1,200,000 Intorest payable on loan ‘Tol soured cis Total fe assets BA Silution [Net foe assets Estimated recovery percentage or oumecireretrstetiont = nay priority priority «ncn oeaine) 1907000 abo eR 330,000 realizable value of equipment + 750,000 unsecured see llow x 63.45%) = 805,875 recoverable amount (1,000,000 = 80,000) ~ 805,875 = 274,125 5 Realisable Book salves ASSETS a Tra niga tice reins 2at0,00 “Land and building aw.0 {aa posable camo) Irtoest payable mn 0m Assets pledged to partially secured creditors: suxjoon “Equipment netasae rag) SSN soon Cash rw. 204000 Acct. rosivablowoesony 38040 530,000 rwentory st") seni 1200900 Tel feasts 20K tee Unsure ilies sow) ‘with priory ere) (pene) Net frecasets Tao stunted deliency (agers) Sa SaraTissce sevepriority abate Ligaiation costs S88, Pils & Pag rane ‘901000 Income tax payable Til unsced akties solr Fully secured creditor: 1.201000 Loon payable 20000 Inert payable oan - Partially seared creditors: ote posable sanau "nent payable som Equipment not (350,000) 730,00 Page |10 Unsecured coedtors without priority: 140000 Accounts payable Toa eccad erltrs ld priity (a.m Shareholders equity Accounts payable @ book value 1.900.000 Disenuint x00) Waived (30,000 Accounts ple ected setement at 1L157,000 6. B-90,000 63.5% see above = 57,105 7 SWuior Not free assets Estimated recovery percentage ——Netfiee assets _ ofenseced reins without ialumseuned priority priory [Estimated recovery "% = 520,000 + 650,000 * Estimated recovery * = 80% Supp syseted net estlemont monn Rites rN (0K 100K) suey ley Ca, 00 Saino, Zam Tea 0,000sc Sutin Assets ta be realized Accounts receivable onan Inventory 90,200 Equipment, net n,n Page | Tovat om00 Assets acquired - ‘Assets realized, . [600% x 90%) - Accounts receivable ise} sso Liwertory [ron x 1/2) x80] 360,000 Equipment, net (GK = 5a) 33,000 Teal Total 1.122.000 ‘Assets not realized Accounts receivable (600K x 10%) 60,000 Livestery (900K 1/2) 470,000 Teal 510,000 Liabilities tobe liquidated Accounts payable 14.0 Loan payable 1,500,000, Total 5.10000 Liabilities assumed sn.000 100,000 Liabilities liquidated ‘Accounts payabl 100, on Loan payable Laman Employee termination benefits 80,000 TotalLiabilities not tquidated Accounts payable (Let aM) Employee termination beneits (100K - 800) Teal Supplementary expenses Liquidation costs 50,000 Supplementary income 8A Station Asst ote reas Acct reent Ante acqued 1090 Aste ot lend abies ised LINO 31 nny usa Libiites not iguiated 100,00) Lisbities assume Supplomentary expenses sao] toc00 — Tem asEo Negron ey 10.8 Sion Estate deficit Opening 2M-31m) Too New li employee 100000 | 1921000 Net gain (we ade) Page |B TUR 00 endPROBLEM 5: FOR CLASSROOM DISCUSSION 1. Solutions Reguirement (a): Assets pledged to fully secure creditors: and sn, Assets pledged Lo partially secured eres: Exqiipment = net 150.000 Total assets at realizable value 2109000 Ls Soeur ret Pally secured - Loan payable 750,000) Partially secures = Note payable oy te RV fi ond Total free assets Lees: Unsecured reins nitproily Estimated administrative expenses Salaries payable Net free assets or Excess ofthe RV afland over loan payable Cash Accounts receivable Total fee assets Less: Unsecured ilies wih prot: ‘imate! administrate expenses «s0.000) Salaries payable (300,000) Net free nssete ENT Regnirement(b): Unsecured liabilities ith prionitye ‘Adiministative expenses 10,000 Salaries posable son,000, 5,00, Fully secured creditors: Loan payable 750,000 Partially secured eraitors: [Notes payable sun, age [5 Unsecured abilities without priority [Note payable excess (00K ISIKAV oer) aan Accounts payable nn TaRegwiresnent (oh 220,000 am Unseen liabilities without priority are) » Deficiency to unsecured now-priority creditors S30;0007 oR Total assets at realizable vale 2,100,000 Total esat settlement amt. 75M» 18K. Exp) (2.95000) Estimated defcieney to unsecured non-priority creditors 530,000) Requirement (ds Estimated recovery percentage Net fre assets of unsecured ereditors without al unsecure fer bates without priority priority 2rneon+ 1050.00 Requirement (ee sono 295% = 14750 Reirement BYE-BYE CORPORATION "AS OF JANUAI 1 200 labor ook Resiatd “ewe alas Assers foal Sears TERI eel fairs eo samy tan pet an payable Psu) ss0g00 Assets pledged to partly scare eredtors: soogm Egmont Taino Never pve oom) ama Gh 2am Sho.) Aeeuns wernt ‘sou sum Tia feet Tan Lise Unsere Filion ‘with prion foe ey ws. Ne frases ry Estimated deiieney pos sooo SS sie SwUnsecured Book Rentzall — mmepeierity values LiAILITiES fcrluce "abilities Tasted bilities th prority = Administrative expenses 10,000 so0.00 — Salanes payable ssa - Fully secure cretion 750.400 Loan payable 30000 - Partially seine croitons: spam ‘Nie payable soon Equipment net as1000)_— 36000 Unsecured creditors sujam —-Assontspayanle mam 70000 “Shareholders eanity Tatts a Requirement (a pening journal en Te Teas ao ay | Accounts receivable sone 9 | ouipment act son ceo ne sane Estate deficit (squeeze) 450, 000 “Accounts payable m0 Sales pryaate S000 Nats payable 0100 Loan payable 0000 i Journal entry for new assets and Hibiites Fe [Este deficit 3007 ok, | Intret payable 3e,000 Iik_joumal enti for the transactions [Cask a0 Fata deficit ime Accounts receivable 000 wah Ta Tate deficit 0000 Teupment ono Notes payable son.cco ash 150000 [sat deficit 50000 | Gans Tara Land ana Tate deficit ‘000 Lean payable 0.000 Interest payable sae) ‘Cat 730000TF] Accounts payable ome =a Salaries payable (nx x9 0, o00 Cash 550,000 | Bate ti aa Cash 240,000 Requirement (Oh: Assers Assets tobe reali Assets realised ‘Aecouniercresble 500000 Anountseciable 28000, equipment. net 0.990 Equpmene ranto Land 140000 Land 1.400 tl Ziman “ea Tana Assets acquired Assets nt wate 09 Aesountsaxevable 0 uapturries Linitities liquidated: Libis to be liquidate: ‘Accunispsyale—3¥,m9 Areountspayeble meno Saris ppable AMON) Sari pale sou ‘Ne payable saan Noe payable son. tan posable 70.19 Lean payable rma inerstpayanle xm Tal Tao Teal =a init not Higuidatee Liabilities assumed ‘Accounts payatle 350,000 nett payable san Salaries pale, 00 weal sn00" SUPPLEMENTARY ITEMS Supplementary expenes: Sipplementary income: Liguidstioncode 0) [Net loss for the year ZumRequirement (eh Page [19 I eg bal ‘Assets 1, 450,00 realized Liabilities liquidated ‘Administrative 240,000 expenses 310.000, oR Beg, bal @ (&) 150,000 ® 10,0 © 0 © @ © Requirement (8) Estate deficit ‘opening 5000 | new 00) liability ° ~ new asset sransactons om a0 o nd. From journal entries (a) to (e) 120K + 45UK ~ 350K — 400K + 240K ok net debit OR Estate deficit 5007 30.0) ° 00 450,000 | 350,000 (6)© mga (©) 510,00 o end RECONCILIATION: ASSETS =e