Chapter 18 CORPORATE LIQUIDATIONS and REORGANIZATIONS

Answers to Questions 1 2 Equity insolvency occurs when a debtor is unab e to !a" its debts as the" co#e due$ Bankruptcy insolvency occurs when a debtor%s iabi ities e&ceed the 'air (a ue o' a assets$ A ban)ru!tc" !roceedin* is desi*nated voluntary i' the debtor cor!oration 'i es the !etition to ! ace itse ' under the !rotection o' the ban)ru!tc" court and involuntary i' creditors 'i e the !etition to brin* the debtor into ban)ru!tc" court$ An in(o untar" !etition #a" be 'i ed b" a sin* e creditor with an unsecured c ai# o' +,-./00 or #ore i' there are 'ewer than twe (e unsecured creditors$ Otherwise. three or #ore entities with unsecured c ai#s tota in* at east +,-./00 #ust 'i e in order to co##ence an in(o untar" case$ The re1uire#ents are the sa#e 'or Cha!ter 2 and Cha!ter ,, cases$ The duties o' the U$S$ trustee are to #aintain and su!er(ise a !ane o' !ri(ate trustees e i*ib e to ser(e in Cha!ter 2 cases. to ser(e as trustee or interi# trustee in so#e ban)ru!tc" cases. to su!er(ise the ad#inistration o' ban)ru!tc" cases. and to !reside o(er creditor #eetin*s$ 3an)ru!tc" 4ud*es sti su!er(ise cases in districts without U$S$ trustees$ The debtor cor!oration in a ban)ru!tc" case has the 'o owin* duties5 6,7 to 'i e a ist o' creditors. a schedu e o' assets and iabi ities. and a state#ent o' the debtor%s 'inancia a''airs8 6-7 to coo!erate with the trustee so that the trustee #a" !er'or# his duties8 6/7 To surrender a !ro!ert". inc udin* boo)s. docu#ents. records. and so on. to the trustee8 and 697 to a!!ear at hearin*s o' the ban)ru!tc" court as re1uired$ A trustee is not a!!ointed in a Tit e ,, cases$ In Cha!ter 2 cases. a trustee wi be e ected b" unsecured creditors i' a #a4orit" o' creditors (ote 'or the trustee. and those creditors ho d at east -0 !ercent o' the c ai#s$ Otherwise. an a!!ointed interi# trustee ser(es as trustee$ In Cha!ter ,, cases a trustee is a!!ointed on " i' dee#ed necessar" b" the court. but otherwise. the debtor re#ains in !ossession o' the estate and !er'or#s the duties o' a trustee$ :ithin /0 da"s 'ro# the ti#e the court orders the a!!oint#ent o' a trustee in a Cha!ter ,, case. a !art" in interest #a" re1uest the e ection o' a trustee$

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18-2

Corporate Liquidations and Reorganizations

The trustee in a i1uidation case ta)es !ossession o' the debtor%s estate. con(erts estate assets into cash. and distributes the !roceeds as directed b" the court$ The" a so !er'or#s other duties such as in(esti*atin* the 'inancia a''airs o' the debtor. !ro(idin* in'or#ation about the estate to !arties o' interest. e&a#inin* creditor c ai#s and ob4ectin* to those that a!!ear i#!ro!er. o!eratin* the debtor%s business i' authori;ed to do so b" the court. !ro(idin* 'inancia re!orts and su##aries about the estate to the court. and 'i in* re!orts on trusteeshi! as directed b" the court$ The !riorit" ran)in*s in a Cha!ter 2 i1uidation case are su##ari;ed in E&hibit ,<=- o' the te&t$ The !riorities reco*ni;ed 'or unsecured c ai#s 6Ran) II7 are5 6,7 ad#inistrati(e e&!enses. 6-7 c ai#s incurred between an in(o untar" 'i in* and a!!oint#ent o' a trustee. 6/7 sa ar" c ai#s u! to +,0.000 !er indi(idua earned within >0 da"s o' 'i in*. 697 e#! o"ee bene'it ! an contribution c ai#s u! to +,0.000 !er indi(idua earned within ,<0 da"s o' 'i in*. 6?7 indi(idua c ai#s u! to +,.<00 'or *oods and ser(ices !urchased 'ro#. but not !ro(ided b" the debtor. and 6@7 c ai#s o' *o(ern#enta units 'or ta&es owed b" the debtor 6sub4ect to ti#e restrictions7. inc udin* ta&es co ected and withhe d 'or which the debtor is iab e$ Aour ran)s within the unsecured non!riorit" c ai# cate*or" 6*enera unsecured c ai#s7 are5 6,7 c ai#s a owed that were ti#e " 'i ed. 6-7 c ai#s a owed where !roo' was 'i ed ate. 6/7 c ai#s a owed 'or 'ines. !ena ties or 'or'eitures. or da#a*es. and arisin* be'ore the court order 'or re ie' or a!!oint#ent o' a trustee. and 697 c ai#s 'or interest on unsecured c ai#s$ The accountant%s state#ent o' a''airs is a 'inancia state#ent that is desi*ned to !ro(ide in'or#ation about i1uidation (a ues and !riorit" ran)in*s 'or use b" the trustee. the court. creditors. and other interested !arties in the debtor%s estate$ Assets are #easured at e&!ected net rea i;ab e (a ues in the state#ent. but boo) (a ues are a so inc uded 'or re'erence !ur!oses$ A debtor cor!oration%s estate #a" be i1uidated e(en thou*h the 'i in* is under Cha!ter ,,$ This can occur when the case is trans'erred to Cha!ter 2 'or i1uidation$ It can a so be carried out in accordance with an a!!ro(ed Cha!ter ,, ! an o' reor*ani;ation that ca s 'or sa e and distribution o' the !roceeds 'ro# the debtor cor!oration%s estate$ A debtor in !ossession reor*ani;ation case is a Cha!ter ,, case in which the ban)ru!tc" court does not a!!oint a trustee. but instead. a ows the debtor cor!oration to carr" out the duties that otherwise wou d be !er'or#ed b" a trustee$ A creditor co##ittee can 'i e a ! an o' reor*ani;ation under a Cha!ter ,, case a'ter ,-0 da"s 'ro# the date the court order 'or re ie' is *ranted$ The order 'or re ie' occurs when the debtor or creditor%s 'i in* !etition is a!!ro(ed b" the court$ The a!!ro(a o' a ! an o' reor*ani;ation re1uires acce!tance o' the ! an b" at east twoBthirds in do ar a#ount and o(er ha ' in nu#ber o' c ai#s in each c ass o' c ai#s$ Aurther. each c ass o' c ai#s #ust acce!t the ! an or not be i#!aired under it$ A c ass o' c ai#s that wou d recei(e nothin* i' the cor!oration were i1uidated is not i#!aired i' it recei(es nothin* under a ! an and. accordin* ". acce!tance b" that c ass o' c ai#s is not re1uired$

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Chapter 18

18-3

14

Prepetition liabilities are the iabi ities o' an enter!rise that were incurred !rior to a Cha!ter ,, 'i in*$ The" are re!orted at the a#ounts a owed b" the ban)ru!tc" court$ Prepetition liabilities subject to co pro ise are those iabi ities that #a" be i#!aired b" a ! an and that are e i*ib e 'or co#!ro#ise because the" are either unsecured or undersecured$ Reorganization value is an esti#ate o' the (a ue o' the reconstituted entit" that wi e#er*e 'ro# reor*ani;ation. ! us the e&!ected net rea i;ab e (a ue o' the assets that wi be dis!osed o' be'ore reconstitution occurs$ It is a so described as the 'air (a ue o' the entit" be'ore considerin* iabi ities$ Reor*ani;ation (a ue a!!ro&i#ates the a#ount a wi in* bu"er wou d !a" 'or the assets o' the entit" i##ediate " a'ter the restructurin*$ Aresh start re!ortin* shou d be used b" a co#!an" e#er*in* 'ro# Cha!ter ,, i' the 'o owin* two conditions are #et5 6,7 the reor*ani;ation (a ue o' the assets o' the e#er*in* entit" i##ediate " be'ore the date o' con'ir#ation is ess than the tota o' a !ost!etition iabi ities and a owed c ai#s and 6-7 ho ders o' e&istin* (otin* shares i##ediate " be'ore con'ir#ation recei(e ess than ?0 !ercent o' the (otin* shares o' the e#er*in* entit"$ Entities not 1ua i'"in* 'or 'resh start re!ortin* re!ort iabi ities co#!ro#ised b" a con'ir#ed reor*ani;ation ! an in a #anner si#i ar to that o' a note issued in a noncash transaction under AAS3 ASC </?$ Aor*i(eness o' debt shou d be re!orted as an e&traordinar" ite#$

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Corporate Liquidations and Reorganizations

SOLUTIONS TO EXERCISES Solution E18-1 1 b 2 d 3 c 4 d Solution 18-2 1 a 2 d 3 c 4 d

Solution E18-3 Note receivable from Pat !mount secured b" inventor" items at e#pected recoverable value 'nsecured portion of note receivable from Pat E#pected recover" on the dollar for unsecured claims E#pected recover" on unsecured portion of note !dd) *ecured portion +otal e#pected recover" on note from Pat Solution E18-4 1 ,n the basis of the reorgani-ation value, .a# /ualifies for fresh start reporting because the estimated reorgani-ation value of 2,000,000 is less than the postpetition liabilities and allo0ed claims. Estimated reorgani-ation value 1iabilities) Postpetition liabilities Prepetition liabilities 2ull" secured debt E#cess liabilities over reorgani-ation value 2 2,000,000 1,200,000 1,%00,000 300,000 200,000 $%0,000& 1%0,000 .(% %2,%00 %0,000 102,%00

(,400,000 1,400,000

,ld stoc5holders must retain less than a %06 interest in the 7ne0 entit".8 9eorgani-ation value 1ess) Pa"ment to prepetition claimants 9eorgani-ed capital structure) Postpetition liabilities Notes pa"able 2ull" secured debt 1,200,000 (00,000 300,000 2,000,000 1%0,000 1,:%0,000

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Chapter 18

18-5

Ne0 common stoc5 to prepetition claimants Ne0 common stoc5 to old stoc5holders Solution E18-5 <ash available for distribution =ortgage pa"able $secured portion& Priorit" claims $administrative e#penses and salaries& !vailable for unsecured, nonpriorit" claims 'nsecured, nonpriorit" claims) .alance of mortgage pa"able !ccounts pa"able 'nsecured, nonpriorit" claims :0,000 available cash> 140,000 claims ?

(;%,000

2,;;%,000 $32%,000&

200,000 $100,000& 100,000 $20,000& :0,000 40,000 100,000 140,000

.%0 on the dollar

Schedule of Di t!i"ution of #$%il%"le C% h =ortgage pa"able C secured portion 'nsecured, priorit" claims =ortgage pa"able C unsecured portion $ 40,000 !ccounts pa"able $ 100,000 .%0& +otal cash distributed 100,000 20,000 (0,000 %0,000 200,000

.%0&

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18-6

Corporate Liquidations and Reorganizations

SOLUTIONS TO &RO'LE(S Solution &18-1 1 Entries on trustee@s boo5s) March 1, 2011 <ash !ccounts receivable C net Inventories 1and .uildings C net Intangible assets !ccounts pa"able Note pa"able C unsecured 9evenue received in advance Bages pa"able =ortgage pa"able Estate e/uit" +o record custod" of *co in li/uidation. A,000 :,000 (4,000 20,000 100,000 24,000 %0,000 A0,000 1,000 (,000 :0,000 20,000

March 2011 <ash ;,200 Estate e/uit" :00 :,000 !ccounts receivable C net +o record collection of receivables and recogni-e loss. <ash Estate e/uit" Inventories +o record sale of inventories at a loss. 13,A00 14,400 (4,000

<ash 30,000 Estate e/uit" (0,000 1and .uildings C net +o record sale of land and buildings at a loss. Estate e/uit" Intangible assets +o 0rite off intangible assets at a loss. Estate e/uit" !dministrative e#penses pa"able C ne0 +o accrue trustee e#penses. 24,000

20,000 100,000

24,000 :,200 :,200

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Chapter 18

18-7

Solution &18-1 $continued& 2 Sco in T!u tee hi) .alance *heet at =arch (1, 2011 Assets <ash Liabilities And Deficit !ccounts pa"able Note pa"able C unsecured 9evenue received in advance Bages pa"able =ortgage pa"able !dministrative e#penses pa"able C ne0 +otal liabilities 1ess) Estate deficit +otal liabilities less deficit *tatement of <ash 9eceipts and Cisbursements from =arch 1 to =arch (1, 2011 <ash balance, =arch 1, 2011 !dd) <ash receipts <ollections of receivables *ale of inventories *ale of land and buildings 1ess) <ash disbursements $none& <ash balance, =arch (1, 2011 *tatement of <hanges in Estate E/uit" from =arch 1 to =arch (1, 2011 Estate e/uit", =arch 1, 2011 1ess) 1oss on uncollectible receivables 1oss on sale of inventories 1oss on sale of land and buildings 1oss on 0riteDoff of intangibles !dministrative e#penses Estate deficit, =arch (1, 2011 :00 14,400 (0,000 24,000 :,200 20,000 ;,200 13,A00 30,000 A,000 120,400 %0,000 A0,000 1,000 (,000 :0,000 :,200 1:2,200 $41,400& 120,400

114,400 120,400 0 120,400

:1,400 41,400

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18-8

Corporate Liquidations and Reorganizations

Solution &18-1 $continued& 3 Entries on trustee@s boo5s) April 2011 =ortgage pa"able :0,000 <ash :0,000 +o record pa"ment of secured creditors from proceeds from sale of land and buildings. !dministrative e#penses pa"able C ne0 9evenue received in advance Bages pa"able <ash +o record pa"ment of priorit" liabilities. :,200 1,000 (,000 12,200

!ccounts pa"able 1%,:00 12,400 Note pa"able C unsecured <ash 2:,A00 +o record pa"ment of .(2 per dollar to unsecured creditors $available cash of 2:,A00 divided b" unsecured claims of 30,000&. !ccounts pa"able (A,200 2;,A00 Note pa"able C unsecured Estate e/uit" 41,400 +o 0rite off remaining liabilities and close trustee@s records.

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Chapter 18

18-9

Solution &18-2 1 !mount e#pected to be available for unsecured claims) +otal amount e#pected to be available for all claims 1ess) Pa"ments to secured and priorit" claims =ortgage pa"able Note pa"able Priorit" claims E#pected to be available for unsecured nonpriorit" claims 2 E#pected recover" per dollar of unsecured claims) E#pected to be available $from 1& ? ;0,000 'nsecured claims $ %%0,000 D (;%,000& ? 1;%,000 E#pected recover" on the dollar) 3 ;0,000> 1;%,000 ? .A0 220,000 ;%,000 :0,000 AA%,000

(;%,000 ;0,000

E#pected recover" b" class of creditors) 2ull" secured C mortgage pa"able Partiall" secured C note pa"able ;%,000 E $ 2%,000 .A0& Priorit" unsecured C liabilities to priorit" creditors 'nsecured nonpriorit" creditors C accounts pa"able $ 1%0,000 .A0& +otal 220,000 :%,000 :0,000 40,000 AA%,000

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18-10

Corporate Liquidations and Reorganizations

Solution &18-3 1 9an5ing of claims) Fully secured: :. Holders of first mortgage and related interest Unsecured priority: 1. !dministrative e#penses 4. Bages pa"able up to A,000 per emplo"ee ;. <ustomer claims for merchandise paid for and not delivered $ma#imum 1,:00 per individual& %. *tate government for gross receipts ta#es (. 1ocal government for propert" ta#es +otal unsecured priorit" claims

22:,%00 12,%00 A;,000 1,%00 (,000 A,000 ;,000 4:,000

Unsecured nonpriority: 2. =erchandise creditors 33,000 A. 1ocal ban5 for principal of loan (0,000 4. President for salar" due over A,000 1,000 A. Interest on unsecured ban5 loan +otal unsecured nonpriorit" claims +otal all claims 2 Cistribution of available cash) 1st 2nd (rd Ath %th =ortgage holders $1006& !dministrative e#penses $1006& Emplo"ees $up to A,000 each& $1006&

1(0,000 A,%00 1(A,%00 A(1,000

22:,%00 12,%00 A;,000 1,%00 (,000 A,000 ;,000

<ustomers for merchandise not delivered $1006& *tate government $1006& 1ocal government $1006&

F9emaining cash $ (;A,%00 D 234,%00& of ran5 ? .40 return on dollarG 4th

;:,000> 1(0,000 claim of ne#t %3,A00 1:,000 400

=erchandise creditors $ 33,000 .40& 1ocal ban5 for loan principal $ (0,000 .40& <ompan" president $ 1,000 .40& +otal distributed $e/ual to available cash&

;:,000 (;A,%00

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Chapter 18

18-11

Solution &18-4 1 *%nn% Co!)o!%tion *tatement of !ffairs on Hune (0, 2011 Assets 9eali-able IaluesD 1iabilit" ,ffsets for *ecured <reditors Pledged for partially secured creditors E/uipment C net 1ess) =ortgage note pa"able and accrued interest A ailable for priority and unsecured creditors <ash !ccounts receivable C net Inventories +otal available for priorit" and unsecured creditors 1ess) Priorit" liabilities +otal available for unsecured creditors Estimated deficienc" 32,200 Liabilities And !toc"holders# $%uity .oo5 Ialue 12,000 Priority liabilities Bages pa"able $assumed under A,000 per emplo"ee& Partially secured creditors Note pa"able and accrued interest 1ess) E/uipment pledged as securit" Unsecured creditors !ccounts pa"able 9ent pa"able !toc"holders# e%uity <apital stoc5 9etained earnings $deficit& (;,000 *ecured and 'nsecured NonD Priorit" <laims priorit" <laims 12,000 2:,000 $(1,000& 0 9eali-able Ialue !vailable for 'nsecured <reditors

.oo5 Ialue %%,000

2,200 1%,000 20,000

2,200 1(,%00 22,%00 (:,200 12,000 24,200 10,:00 (;,000

(1,000

(1,000 $2:,000& (,000 24,A00 ;,400

24,A00 ;,400 %%,000 $(3,:00& 32,200

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18-12

Corporate Liquidations and Reorganizations

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Chapter 18

18-13

Solution &18-4 $continued& 2 Estimated pa"ments per dollar for unsecured creditors <ash available Cistribution to partiall" secured and unsecured priorit" creditors) Note pa"able and interest !dministrative e#penses Bages pa"able !vailable to unsecured nonpriorit" creditors ? ! Note pa"able and interest $unsecured portion& !ccounts pa"able 9ent pa"able 'nsecured nonpriorit" claims ? . !>. ? 22,200> (;,000 ? .40 per dollar of cl%i2:,000 A,000 12,000 44,200

AA,000 22,200 (,000 24,A00 ;,400 (;,000

E+)ected !eco$e!, fo! e%ch cl% Partially secured

Note pa"able and interest *ecured portion 'nsecured portion $ (,000 Unsecured priority !dministrative e#penses Bages pa"able Unsecured nonpriority !ccounts pa"able $ 24,A00 .40& 9ent pa"able $ ;,400 .40& +otal pa"ments

.40&

2:,000 1,:00

23,:00

A,000 12,000

14,000

1%,:A0 A,%40

20,A00 44,200

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18-14

Corporate Liquidations and Reorganizations

Solution &18-5 1 Assets .oo5 Ialue 210,000 2%0,000 Fully secured !ccounts receivable C net 1ess) Notes pa"able Partially secured 1and and buildings C net 1ess) =ortgage and interest pa"able Unsecured <ash Inventories E/uipment C net Intangible assets !vailable for priorit" and unsecured Priorit" liabilities !vailable for nonpriorit" unsecured Estimated deficienc" 9eali-able IalueD 1iabilit" ,ffsets 140,000 100,000 1A0,000 20%,000 0 :0,000 210,000 40,000 0 A10,000 1%0,000 240,000 1%%,000 A1%,000 *ecured and Priorit" <laims Priority liabilities !ccounts pa"able Bages pa"able +a#es pa"able Fully secured Note pa"able 1ess) !ccounts receivable C net Partially secured =ortgage and interest pa"able 1ess) 1and and buildings C net Unsecured !ccounts pa"able <apital stoc5 9etained earnings deficit %0,000 2A,000 ;4,000 1%0,000 100,000 140,000 $40,000& 20%,000 1A0,000 4%,000 'nsecuredD Nonpriorit" <laims 9eali-able Ialue !vailable for 'nsecured 40,000 D%.n Co!)o!%tion C in Ch%)te! / *tatement of !ffairs at Hul" 10, 2011

:0,000 200,000 1%0,000 10,000

300,000 $%uities .oo5 Ialue %0,000 2A,000 ;4,000 100,000

20%,000

4%,000 (%0,000 A1%,000

(%0,000 (00,000 $20%,000& 300,000

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Chapter 18

18-15

Solution &18-5 $continued& 2 Priority clai&s !dministrative e#penses !ccounts pa"able Bages pa"able +a#es pa"able Fully secured clai&s Note pa"able Partially secured clai&s =ortgage and interest pa"able Unsecured !ccounts pa"able <laims b" Priorit" 9an5s 11,000 %0,000 2A,000 ;4,000 100,000 20%,000 (%0,000 :14,000 !mounts to !mounts to .e .e Paid Britten ,ff 11,000 %0,000 2A,000 ;4,000 100,000 1A0,000 (3,000 210,000 4%0,000 24,000 1A0,000 144,000

<alculation of recover" for unsecured nonpriorit" claims <ash available 1ess) Paid to priorit" claims 1ess) Paid to full" secured claims 1ess) Paid to partiall" secured creditors = secured portion ! <ash available for unsecured 4%0,000 $141,000& $100,000& $1A0,000& 2A3,000 4%,000 (%0,000 A1%,000 .40 recover" on the dollar

'nsecured claims) Partiall" secured $ 20%,000 D 1A0,000 secured& !ccounts pa"able C nonpriorit" . +otal unsecured claims 2A3,000> A1%,000 ?

! . ?

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18-16

Corporate Liquidations and Reorganizations

Solution &18-0 1 Assets 9eali-able IaluesD 9eali-able 1iabilit" Ialue ,ffsets for !vailable for *ecured 'nsecured <reditors <reditors Pledged for fully secured creditors 1and and building 1;0,000 1ess) =ortgage pa"able and accrued interest $14%,000& A ailable for priority and unsecured creditors <ash !ccounts receivable C net Inventories =achiner" C net Jood0ill +otal available for priorit" and unsecured <reditors 1ess) Priorit" liabilities +otal available for unsecured creditors Estimated deficienc" E$e!l% t 1indo. Co!)o!%tion *tatement of !ffairs on Hune (0, 2011

.oo5 Ialue 2(0,000

%,000 A0,000 4(,000 A2,000 20,000 0 1;0,000 ;0,000 100,000 4%,000 14%,000 'nsecured NonDpriorit" <laims

A0,000 ;0,000 %0,000 40,000 %0,000

%00,000 Liabilities and !toc"holders# $%uity .oo5 Ialue 40,000 10,000 1%0,000 1%,000 110,000 %0,000 %,000 200,000 $100,000& %00,000 2 Priority liabilities Bages pa"able Propert" ta#es pa"able Fully secured creditors =ortgage pa"able Interest on mortgage pa"able Unsecured creditors !ccounts pa"able Note pa"able C unsecured Interest pa"able C unsecured !toc"holders# e%uity <apital stoc5 9etained earnings $deficit& *ecured and Priorit" <laims 40,000 10,000 ;0,000 1%0,000 1%,000 14%,000

110,000 %0,000 %,000

14%,000

*ettlement per dollar of ran5 1 unsecured creditors is .42%0 $ 100,000 available for unsecured> 140,000 accounts and notes pa"able&. No pa"ment is made for the %,000 unsecured interest claim. Pearson Education, Inc. publishing as Prentice Hall

Chapter 18

18-17

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18-18

Corporate Liquidations and Reorganizations

Solution &18-/ 1 +he reorgani-ation is eligible for fresh start accounting because the liabilities on Hune (0, 2011 of 14,%00 e#ceed the reorgani-ation value of 14,000 b" %00. !lso, the common stoc5 of the ne0 entit" is allocated %,000 to prepetition creditors and 2,000 to 1o0step@s old stoc5holders, so that the old stoc5holders have less than a %0 percent interest in the ne0 entit". Entries to adKust 1o0step@s accounts for the reorgani-ation plan) Prepetition liabilities 12,%00 !ccounts pa"able $old& :00 Bages pa"able $old& A00 Note pa"able $ne0& (,:00 <ommon stoc5 $ne0& %,000 Jain on debt restructuring 2,%00 +o adKust prepetition liabilities to conform 0ith the plan. 1oss on asset adKustments to fair values Inventories 1and .uildings C net Patent +o adKust assets to their fair values. <ommon stoc5 $old& <ommon stoc5 $ne0& !dditional paidDin capital +o record e#change of common stoc5. Jain on debt discharge !dditional paidDin capital 9eorgani-ation value in e#cess of fair value 1oss on asset adKustments to fair values Ceficit +o eliminate deficit and record adoption of A,000 A00 1,000 1,A00 A,000 ;,000 2,000 %,000 2,%00 %,000 1,000 A,000 A,%00 fresh start reporting.

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Chapter 18

18-19

Solution &18-/ 3

$continued& Lo. te) Co!)o!%tion 2inal .alance *heet as of Hul" :, 2011

Assets <ash +rade receivables C net Inventories 1and .uildings C net E/uipment C net 9eorgani-ation value in e#cess of fair values +otal assets Liabilities and !toc"holders# $%uity !ccounts pa"able !ccounts pa"able $old& Bages pa"able Bages pa"able $old& Notes pa"able $ne0& +otal liabilities <ommon stoc5 $ne0& +otal liabilities and stoc5holders@ e/uit"

4,;00 1,000 2,000 2,000 1,%00 1,:00 1,000 14,000

(,000 :00 1,000 A00 (,:00 3,000 ;,000 14,000

Note) +he final balance sheet of 1o0step <orporation 0ill be the same as the beginning balance sheet of Highstep <orporation.

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