Chap 013

Chapter 13 - Accounting for Legal Reorganizations and Liquidations

CHAPTER 13ACCOUNTING FOR LEGAL REORGANIZATIONS

AND LIQUIDATIONS

Chapter Outline

I. Because of a myriad of possible financial or business difficulties, a company may become insolvent, unable to pay its debts as they come due.A. To ensure the equitable treatment of all parties involved with an insolvent company

(stockholders as well as creditors), laws have been written to provide structure for the bankruptcy process in the United States.

B. At present, legal guidance is provided primarily by the Bankruptcy Reform Act of 1978 as amended.1. This law attempts to arrive at a fair distribution of a debtor's assets. 2. It also seeks to discharge the obligations of an honest debtor.

II. Bankruptcy proceedings can be formally instigated by either the debtor or a group of creditors.A. A voluntary petition is filed with the court by the insolvent company while an involuntary

petition must be filed by a minimum number of creditors with, at least, a minimum level of debt.

B. After a bankruptcy petition is received, normally the court will grant an order for relief to halt all actions against the debtor.

III. Within the bankruptcy process, determining the appropriate classification of every creditor is an important step in achieving a fair settlement.A. Fully secured creditors hold a collateral interest in assets of the insolvent company

having a value in excess of the related liability.B. Partially secured creditors also have a collateral interest but the expected net realizable

value will not satisfy the entire obligation.C. Some unsecured obligations (including administrative expenses, certain debts to

employees, and government claims for unpaid taxes) have priority over other unsecured debts.

D. All remaining unsecured creditors will receive assets from the debtor only after all of the above claims have been satisfied.

IV. A Statement of Financial Affairs is frequently produced by an insolvent company to disclose its current financial position.A. Assets are reported at net realizable value along with the disclosure of any pledged

amounts. Liabilities are classified according to the security or priority of the creditor.B. A Statement of Financial Affairs is especially useful if prepared at the beginning of the

bankruptcy process to assist all parties in evaluating the outcome of various actions.C. Most of the asset balances reported in this statement are merely estimations,

projections of future events.V. Bankruptcy proceedings often conclude with the assets of the debtor being liquidated to

satisfy creditor claims (a Chapter 7 bankruptcy).

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A. A trustee is appointed to oversee termination of business affairs, liquidation of noncash properties, and distribution of cash resources.

B. The trustee prepares a periodic reporting of activities, frequently in the form of a Statement of Realization and Liquidation.1. This statement indicates the book value and classification of remaining assets and

liabilities.2. It also discloses the effects of all transactions that have occurred to date.

Vl. As an alternative to liquidation, a company may seek to stay in business and attempt to return to solvency (a Chapter 11 bankruptcy).A. A reorganization plan has to be devised that can win the approval of each class of

creditors and each class of stockholders as well as the bankruptcy court.B. Reorganization plans normally lay out a specific course of action designed to save the

company and can include proposed changes in operations, methods of generating additional working capital, and a settlement of the debts that were in existence on the day that the order for relief was entered.

Vll. Financial reporting during reorganization is important to allow parties to follow the progress being made.

A. The AICPA Statement of Position 90-7 (SOP 90-7) provides guidance for preparing financial statements while a company goes through reorganization.1. Gains, losses, revenues, and expenses that result from reorganization must be

reported separately on the income statement. 2. Professional fees incurred in connection with the bankruptcy must be expensed

immediately.3. Liabilities subject to compromise are reported on the balance sheet based on the

expected amount of the allowed claims.

VIII. Fresh start accounting may be required when a company emerges from reorganization.A. Assets are restated to current value but only if the fair value of assets is less than the

allowed claims and the original owners are left holding less than 50 percent of company.

B. The recognition of goodwill may also be required if the reorganization value of the emerging company is greater than the value of the identifiable assets (both tangible and intangible).

C. Retained earnings is set at zero to indicate that a new entity has been formed.

Answers to Discussion Questions

What Do We Do Now?

Students are given a chance in this case to look at a non-accounting business decision: the forcing of a valued client into bankruptcy. Thurber has already committed several unfortunate mistakes in this case. For example, he has seen a dramatic slowdown in cash payments by Abraham and Sons without seeking any further information about the prospects of the client. Furthermore, he has let the treasurer pressure him into providing additional credit without any

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valid justification. He is now being pushed by another company into filing a bankruptcy petition without adequate assurance that Abraham and Sons has a real problem.

Because Thurber has not acted earlier, he should now request audited financial statements from Abraham and Sons so that he can make a reasonable decision as to the course of action to take. Many important figures can be gleaned from these statements including the amount of the company's working capital, the current ratio, the debt to equity ratio, the trend in sales, the trend in long-term debt, operating cash flows, the gross profit percentage, any expenses that have risen at a fast rate, the amount of property that has been mortgaged, and the like. He should then ask for a meeting with the treasurer (or another officer) of Abraham and Sons. In this meeting, Thurber should discuss the possibility of having the current debt secured in some manner as protection. The development of a formal repayment schedule would also be wise.

If Thurber is not satisfied by the financial statements and the discussion with the client, he should meet with the clothing manufacturer who has called as well as with a lawyer and/or accountant. They should discuss possible actions and the outcomes that could result from each. Inevitably, if loss of the receivable seems probable, filing an involuntary petition for bankruptcy may be the wisest course of action to take. However, that procedure should only be undertaken after adequate study has been made. In the long run, companies do not prosper by having their clients go into bankruptcy.

Students often address this type of case as either a black or white issue: give more credit or force them into bankruptcy. The case simply does not provide enough data to arrive at either choice. Thus, the students should be directed to consider the types of information that could prove to be beneficial in making this decision. Often, in decision-making, the gathering of information is the key step in arriving at the proper conclusion.

How Much Is That Building Really Worth?

College textbooks often present fair value as if it were a known number that was easily determined. Students may view an asset’s fair value as if getting that much money was virtually assured. Thus, they often believe that producing a statement of financial affairs requires little more than establishing and reporting what a buyer will pay for an asset.

This case was written to emphasize that net realizable value might actually be no more than a wild guess. Obviously, the value of most stocks and some bonds can be determined with accuracy. However, many other assets such as the building in this case might eventually prove to have a liquidation value that can vary from zero (many deserted buildings are simply never sold because no one wants to buy that type of building in that particular location even if it is in great condition) up to a significant amount.

The accountant faces the problem of preparing a statement of financial affairs that requires that a single number be reported as the value of each asset. Users of this statement can then make important financial decisions based on the number that is presented. Subsequently, the actual amount received may be significantly higher or lower than the figure shown. The users of the information may feel as if they have been mislead when, in fact, the accountant made the best estimation possible.

Given the problems faced in determining fair value, the accountant will probably seek a very conservative number for reporting purposes. In most cases, less potential damage will be created by reporting a relatively low figure. However, use of a particularly low value may tempt the creditors to allow the company to reorganize because little would seem to be gained by forcing liquidation. For this reason, a conservative approach can favor the company attempting to avoid liquidation.

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Probably the most important lesson from this case is that decision makers should look with skepticism on many of the numbers reported as representing fair value. In some cases, fair value is a figure that can only be estimated and may depend on a number of factors that cannot be anticipated in advance by the accountant or by anyone else.

Is this the Real Purpose of the Bankruptcy Laws?During the 1980s, as described in this case, the country saw a rash of bankruptcies that were filed to resolve major financial problems. Previously, the bankruptcy laws had been used almost exclusively to settle insolvency problems. However, if a voluntary petition is filed and accepted by the courts, companies such as Manville and A. H. Robins are provided with a method of settling issues before actual insolvency occurs. Sometimes the final results are good for the companies but not always. A. H. Robins, for example, had to agree to be bought as one of the conditions of its reorganization. In effect, the company lost its independence in order to satisfy the lawsuits resulting from the Dalkon Shield.

As with many of the discussion questions in this book, this case is intended to alert students to a real-life issue and encourage them to consider the ramifications. To function in society, accounting students must know more than just the mechanical aspects of a bankruptcy. What are the objectives of the bankruptcy laws and do these particular cases fall outside of those objectives? Would either Manville or its claimants, for example, have been better served by having the company slowly pulled into insolvency over years or perhaps decades? Should a different set of bankruptcy laws be established for companies having these types of financial crises? Although these questions are not directly related to accounting, they are the types of questions that accountants (both as business people and as citizens) need to address.

Answers to Questions

1. "Insolvent" refers to a state of financial position whereby a company (or individual) is unable to pay debts as they come due.

2. In the United States today, the primary piece of federal legislation that governs most bankruptcy proceedings is the Bankruptcy Reform Act of 1978 and its subsequent amendments.

3. Bankruptcy cases have two overriding objectives:— To achieve a fair distribution of assets to the various parties that are involved with an

insolvent company (or individual) and— To discharge the obligations of an honest debtor.

4. A voluntary bankruptcy petition is one filed by an insolvent company to gain protection from its creditors. Creditors may also seek to prevent or limit losses by filing their own (involuntary) petition. Where a company has at least 12 unsecured creditors, a minimum of three (having total unsecured debts of over $13,475) must sign an involuntary petition. If fewer than 12 unsecured creditors exist, only one is needed to file the petition but the minimum debt level remains at $13,475.

5. The granting of an order for relief halts all actions against an insolvent company. The order for relief provides the company as well as the creditors with time to decide on a future course of action. It also brings the court into the process and provides a structure for what might otherwise be a chaotic event, the distribution of assets to the parties involved.

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6. A fully secured creditor has an obligation from an insolvent company but holds a collateral interest in assets that have a value in excess of the debt. Thus, these parties can assume that they will suffer no loss regardless of the outcome of the bankruptcy proceedings. A partially secured creditor also has a collateral interest but the liability is larger than the anticipated proceeds from the realization of the attached assets. A portion of the liability is covered but a risk of loss still exists in connection with the remaining debt. Unsecured creditors have no collateral interest and can only hope to collect after the various secured interests have been satisfied. Obviously, this last group of creditors has the highest chance of incurring a loss.

7. A liability classified "with priority" is still unsecured. However, because of provisions of the Bankruptcy Reform Act of 1978, these debts must be paid before any other unsecured obligations. Thus, the chance of loss is reduced, sometimes significantly. Unsecured liabilities having priority include the following:

— Claims for administrative expenses,— Obligations arising between the date that a bankruptcy petition is filed and the

appointment of a trustee or the issuance of an order for relief.— Employee claims for wages earned during the 180 days preceding the filing of a

bankruptcy petition (limited to $10,950 per person),— Employee claims for contributions to a benefit plan earned during the 180 days

preceding the filing of a bankruptcy petition (within certain restrictions),— Deposits made with the company to acquire goods or services (up to a $2,425 limit), — Government claims for unpaid taxes.

8. Administrative expenses are classified as liabilities with priority to offer some protection to those individuals who serve the company during the period of insolvency. Without a legitimate chance for monetary reward, few people would be willing to provide the various administrative services needed during the bankruptcy process. Also, these debts were incurred after the order for relief.

9. In a Chapter 7 bankruptcy, the assets of the insolvent company are liquidated to satisfy the claims of the creditors. Business activities cease and noncash assets are sold. Conversely, in a Chapter 11 bankruptcy, the company attempts to survive its financial problems and return to solvency. A reorganization plan is developed that will allow the company to continue operations and reach a settlement of its debts. This reorganization plan must be accepted by each class of creditors, each class of stockholders, and the court.

10. Unsecured creditors often face the possibility of absorbing substantial losses in a Chapter 7 liquidation because their claims rank below fully secured and partially secured liabilities. Frequently, little or nothing is expected. Because of this possibility, unsecured creditors may feel that they have a better chance of limiting their losses by agreeing to a reorganization plan to keep the company alive as a potential future customer.

11. The statement of financial affairs helps the parties involved with a bankruptcy to anticipate their potential losses. It reports all assets of the insolvent company at net realizable value whereas liabilities are classified as fully secured, partially secured, with priority, and unsecured. Based on the potential cash inflows and outflows, an estimation can be made of the losses that will be incurred by each group of claimants. A statement of financial affairs is considered especially useful at the beginning of the bankruptcy process since it can assist the parties in evaluating the outcome of various possible actions.

12. In general, a trustee is assigned to prevent loss of the insolvent company's assets and oversee the liquidation and distribution process. A number of rather procedural tasks are normally accomplished by the trustee shortly after appointment such as notifying the post

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office, changing locks, obtaining possession of corporate records, and opening a new bank account. Thereafter, the trustee might have to operate the company for a period of time to complete any business still in process. The trustee also has the power to void any transfer made by the debtor within 90 days prior to the filing of the bankruptcy petition if the company was insolvent at the time. Subsequently, the trustee works to liquidate noncash assets and make appropriate disbursements to the various claimants. During this entire process, the trustee needs to make periodic reportings to the court and other interested parties.

13. A trustee can demand the return of any payment (or other asset transfer) made within 90 days prior to the filing of a bankruptcy petition if the company was already insolvent. This legal procedure is known as the voiding of a preference transfer and is intended to prevent one party from gaining an unfair advantage over the remaining claimants. In effect, the payment is viewed as a distribution of the insolvent company's assets, a process that is to be controlled solely by the trustee and the court.

14. A statement of realization and liquidation is designed to report (1) the account balances of the insolvent company at the date the order for relief is entered, (2) the liquidation of noncash assets, (3) the cash distributions made to the various claimants, (4) any other transactions incurred during this period, and (5) any remaining asset and liability balances.

15. During the liquidation of an insolvent company, control is turned over to an outside trustee. However, in a Chapter 11 bankruptcy (a reorganization), operations will usually be continued so that an attempt can be made to arrive at a plan to save the company. While the bankruptcy proceeds, control is normally retained by the ownership, a group that is then legally referred to as the debtor in possession.

16. In a Chapter 11 bankruptcy, the debtor in possession (the present ownership of the company) is given the initial opportunity of filing a reorganization plan with the court. If a formal proposal is not put forth by the debtor in possession within 120 days of the order for relief or is not accepted within 180 days, any interested party has the right to submit a plan. Bankruptcy proceedings often drag on for lengthy periods because the time limitations can be extended by the court. However, the debtor’s exclusivity to propose a plan cannot be extended beyond 18 months.

17. Numerous types of proposals are to be found in reorganization plans. For example, many will set forth specific ideas for changes to be made in the company's operations (to increase profitability) such as selling assets, closing stores, or terminating complete lines of business. In addition, most reorganization plans identify sources that will be tapped in the future to generate additional funding. Proposed changes in management may also be spelled out in an attempt to persuade claimants that the company will have the ability to overcome its past economic problems. Last, and probably most important, a reorganization plan must include some anticipated settlement of the claims against the company that were in existence at the time the order for relief was entered. Before any reorganization plan is approved, the creditors (as well as the court) must be convinced that the financial rewards will outweigh the amounts that could be received from a liquidation.

18. To become effective, a reorganization plan must be accepted by all interested parties. For approval, each class of creditors (more than two-thirds in dollar amount and one-half in number) must vote for the proposal. Each group of stockholders (two-thirds of the shares being voted) must also accept the plan. The court will then confirm the reorganization plan but only if the court feels that all parties are being treated fairly. The court also has the authority to confirm a proposal even if not accepted by the creditors or stockholders. This procedure (known as a "cram down") is only used if the plan is judged to be fair and equitable.

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19. A "cram down" is a legal provision whereby the court can confirm a reorganization proposal for an insolvent company even though the plan has not been accepted by a particular class of creditors or stockholders. This step is not taken unless the court believes the plan being put forth is fair and equitable.

20. During reorganization, some debts are in jeopardy of being settled at a significantly reduced amount whereas others will probably be paid at face value. Unsecured and partially secured liabilities are likely to be settled at a lowered figure. Conversely, fully secured liabilities and any debts incurred during the reorganization period are normally not at risk of being reduced. Thus, if a balance sheet is produced while a company is in reorganization, all liabilities are reported as either being subject to compromise (reduction) or not being subject to compromise. The debts subject to compromise are reported at the expected amount of allowed claims rather than at an estimation of the settlement figure. Such estimations are often difficult, if not impossible, to make.

21. A company going through a Chapter 11 bankruptcy will report specified reorganization items on its income statement separately from operating figures. However, these reorganization items are reported prior to income tax expense rather than in a manner similar to an extraordinary item. These separately disclosed figures include gains and losses on the sale of assets necessitated by the reorganization. Professional fees incurred in connection with the reorganization are also reported in a similar manner as well as any interest revenue that would not have been earned except for the bankruptcy proceeding.

22. Professional fees incurred during reorganization must be expensed as incurred. Capitalization is not allowed.

23. “Fresh start accounting” refers to the adjustment of a company's assets to current value at the time the organization emerges from bankruptcy. A company must use fresh start accounting if two criteria are met at the time the reorganization is finalized: (1) the fair value of the assets is less than the total allowed claims as of the date of the order for relief plus the liabilities incurred during reorganization and (2) the original owners are left with less than 50 percent of the voting stock.

24. In fresh start accounting, all assets are reported at current value while liabilities are reported based on the present value of the settlement amounts. If the reorganization value of the company as a whole is greater than the total fair value of the individual assets, goodwill is reported for the excess.

Initially, in fresh start accounting, retained earnings must be reported at a zero balance.

25. Fresh start accounting is used by companies that are emerging from a bankruptcy reorganization if the value of the assets held at that time are less than the allowed claims associated with company’s liabilities (those present at the date of the order for relief and those incurred since that date) and the original owners are left with less than 50 percent of the voting stock of the reorganized company.

26. In fresh start accounting, the tangible and intangible assets of the company are reported at their fair values. Liabilities are reported at the present value of the future cash flows.

27. When a company emerges from bankruptcy, the reorganization value of its assets as a whole must be determined. The figure is normally computed by discounting anticipated future cash flows from the business. This figure is then assigned to the various assets of the company based on individual fair values. The total reorganization value may well be greater than the current value of the individual assets. If so, the residual amount is

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recorded as the intangible account Goodwill. Each year (or more often in some cases) it is reviewed for impairment.

Answers to Problems

1. B

2. D

3. B

4. C

5. A

6. D

7. C

8. B

9. C

10.B

11.A

12.A

13.A

14.B

15.C

16.A

17.C

18.A

19.D

20.C

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21.C

22.(10 Minutes) (Distribution of cash in a liquidation)

Free Assets:Current Assets ........................................................... $ 35,000Buildings and Equipment ......................................... 110,000

Total ..................................................................... $145,000

Liabilities with Priority:Administrative Expenses .......................................... $ 20,000Salaries Payable (only $3,000 per employee).......... 6,000Income Taxes ............................................................. 8,000

Total ..................................................................... $ 34,000

Free Assets After Payment of Liabilities with Priority ($145,000 – $34,000) ................................................. $111,000

Unsecured LiabilitiesNotes Payable (in excess of value of security) ...... $ 30,000Accounts Payable ..................................................... 85,000Bonds Payable ........................................................... 70,000

Total ..................................................................... $185,000

Percentage of Unsecured Liabilities To Be Paid: $111,000/$185,000 = 60 %

Payment On Notes Payable:Value of Security (land) ............................................ $ 90,00060% of Remaining $30,000 ....................................... 18,000Total Collected by holders ....................................... $108,000

23.(5 Minutes) (Distribution of assets in a liquidation)

Liabilities with Priority

Paid first—administrative expense................................ $2,450Paid second—wages up to a maximum of

$10,950 for Mr. Key..................................................... 16,950All remaining money—government claims to unpaid taxes 5800

Total of free assets..................................................... $25,200

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No payments will be made in connection with the remainder of the salaries, the government claims and all of the unsecured accounts payable since no money is left.

24. (8 Minutes) (Distribution of assets to partially secured creditors)

Free Assets:Other Assets .............................................................. $ 80,000Excess from Assets Pledged with Fully Secured

Creditors ($116,000 – $70,000) ............................ 46,000Total ..................................................................... $126,000

Liabilities with Priority ................................................... $ 42,000

Free Assets after Payment of Liabilities with Priority($126,000 – $42,000) .................................................. $ 84,000

Unsecured Liabilities:Excess of Partially Secured Liabilities Over Pledged

Assets ($130,000 – $50,000) ................................ $ 80,000Unsecured Creditors ................................................. 200,000

Total ..................................................................... $280,000

Percentage of Unsecured Liabilities To Be Paid: $84,000/$280,000 = 30%

Payment On Partially Secured Debt:Value of Pledged Asset ............................................. $ 50,00030% of Remaining $80,000 ....................................... 24,000

Total to be Collected by holders ........................ $ 74,000

25.(8 Minutes) (Distribution of assets to partially secured creditors)

Free Assets:Cash ........................................................................... $50,000Excess from Assets Pledged with Fully Secured

Creditors ($90,000 – $80,000)............................... 10,000Total....................................................................... $60,000

Liabilities with Priority.................................................... 20,000

Free Assets after Payment of Liabilities with Priority.. $40,000

Unsecured liabilities:Excess of Partially Secured Liabilities Over

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Pledged Assets ($150,000 – $130,000)................ $ 20,000Accounts Payable...................................................... 180,000

Total ..................................................................... $200,000

Percentage of Unsecured Liabilities to be Paid: $40,000/$200,000 = 20%

Payment on Bond:Value of Pledged Asset.............................................. $130,00020% of Remaining $20,000........................................ 4,000

Total to be Received by holders.......................... $134,000

26.(12 Minutes) (Liquidation of assets to satisfy debt)

The holder of Debt Two will receive $100,000 from the sale of the pledged asset. Since the holder wants to receive $142,000 out of the total debt of $170,000, the company must be able to generate enough cash to pay off 60 percent of the unsecured liabilities ($42,000/$70,000) after paying 100 percent of the liabilities with priority ($110,000).

Unsecured Liabilities:Unsecured Creditors ...................................................... $230,000Excess Liability of Debt One in Excess of Pledged Asset

($210,000 – $180,000) ................................................ 30,000Excess Liability of Debt Two in Excess of Pledged Asset

($170,000 – $100,000) ................................................ 70,000Total Unsecured Liabilities.................................. $330,000

Necessary Percentage ................................................... 60%Cash Needed For These Liabilities ............................... $198,000

In order for the holder of Debt Two to receive exactly $142,000, the other free assets must be sold for $308,000. With that much money, the liabilities with priority ($110,000) can be paid with the remaining $198,000 going to the unsecured debts of $330,000. This 60 percent figure would insure that the holder of Debt Two would get $100,000 from the pledged asset and $42,000 ($70,000 x 60%) from the free assets.

28. (8 Minutes) (Payments to be made on unsecured and partially secured liabilities)

a. The unpledged assets of $300,000 must be added to any excess to be received from assets pledged on fully secured debts ($200,000 – $150,000 = $50,000) to get amount of free assets available of $350,000.

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Amount Available ........................................................... $350,000Liabilities with Priority ................................................... (160,000)

Available for Unsecured Creditors .......................... $190,000

Accounts Payable ........................................................... $390,000Partially Secured Debt in Excess of Pledged Assets ($490,000 – $380,000)....................................... 110,000Unsecured Liabilities....................................................... $500,000

Distribution to Unsecured Creditors: $190,000/$500,000 = 38%

An unsecured creditor to whom $3,000 is owed can expect to receive $1,140 ($3,000 x 38%).

b. The bank will receive a total of $87,600. The secured interest will generate $80,000. The remaining $20,000 liability is unsecured so that only an additional payment of $7,600 (38%) can be expected.

28.(20 Minutes) (Distribution of assets in a liquidation)Free Assets: (fair market value)

Cash ........................................................................... $ 10,000Inventory..................................................................... 60,000Equipment................................................................... 50,000

Total ..................................................................... $120,000Liabilities with Priority:

Administrative Expenses .......................................... $ 20,000Income Taxes ............................................................. 30,000

Total ...................................................................... $ 50,000Free Assets After Payment of Liabilities With Priority

($120,000 – $50,000) .................................................. $ 70,000Unsecured Liabilities

Note Payable A (in excess of value of security) ..... $ 20,000Note Payable B (in excess of value of security) ..... 80,000Note Payable C .......................................................... 60,000Accounts Payable ..................................................... 120,000

Total ..................................................................... $280,000Percentage of Unsecured Liabilities To Be Paid: $70,000/$280,000 = 25%

Payment on Note Payable A:Value of Security (land) .................................................. $ 70,00025% of Remaining $20,000 ............................................. 5,000

Total Collected ........................................................... $ 75,000

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Payment on Note Payable B:Value of Security (building) ........................................... $ 40,00025% of Remaining $80,000 ............................................. 20,000

Total Collected ........................................................... $ 60,000Payment on Note Payable C (unsecured):25% of $60,000 ................................................................ $ 15,000Payment on Administrative Expenses:As a liability with priority, the entire amount due is paid. $ 20,000Payment on Accounts Payable (unsecured):25% of $120,000 .............................................................. $ 30,000Payment on Income Taxes Payable:As a liability with priority, the entire amount due is paid. $ 30,000

29.(15 Minutes) (Liquidation of assets to satisfy debt)

Note payable B is unsecured. The holders want at least $125,000 of the total balance of $250,000; thus, there must be at least enough money available to pay 50 percent of the unsecured debts. All values are known except for the equipment.

Unsecured Liabilities:Accounts payable....................................................... $180,000Note payable A—unsecured portion........................ 10,000Note payable B .......................................................... 250,000

Total ..................................................................... $440,000

Free Assets (except for equipment):Cash ........................................................................... $24,000Accounts receivable.................................................. 28,000Inventory..................................................................... 56,000Land (value does not cover related debt)................ -0-Buildings ($320,000 less $300,000

in bonds)................................................................ 20,000Total ..................................................................... $128,000

Less: Liabilities with Priority:Estimated administrative expenses......................... (12,000)Taxes payable to government................................... (20,000)

Total free assets except for equipment.............. $96,000

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In order for unsecured creditors to receive 50 percent of their claims, $220,000 in free assets must be available (50 percent of $440,000). At present only $96,000 is available. Thus, $124,000 must be received from the liquidation of the equipment ($220,000 – $96,000).

30. (15 Minutes) (Payment of various liabilities in a liquidation)Free Assets:

Cash ..................................................................... $30,000Receivables (30 percent collectible)........................ 15,000Inventory..................................................................... 39,000Land (value in excess of secured note:

$120,000 – $110,000)............................................. 10,000Total ..................................................................... $94,000

Less: Liabilities with prioritySalary payable (below maximum)........................ (10,000)Free assets available............................................ $84,000

Unsecured Liabilities:Accounts payable....................................................... $90,000Bonds payable (less secured interest in

building: $300,000 – $180,000)............................ 120,000Unsecured liabilities............................................. $210,000

Percentage of unsecured liabilities to be paid: $84,000/$210,000 = 40%

Amounts to be paid for:Salary payable (liability with priority to be paid

in full)..................................................................... $10,000Accounts payable (unsecured—will collect 40%

of debts of $90,000).............................................. $36,000Note payable (fully secured by land—will collect

entire balance)...................................................... $110,000Bonds payable (partially secured—will collect

$180,000 from building and 40 percent of the remaining $120,000).............................................. $228,000

31.(2 Minutes) (Reporting of debts during liquidation)

Because of the uncertainty of the amount that will be paid on an unsecured debt, no attempt is made in financial reporting to anticipate the payment.

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Liabilities are reported at the expected amount of the allowed claim. In this case, the creditors apparently have a legitimate claim of $200,000.

32.(9 Minutes) (Adjusting a company coming out of reorganization to fresh start accounting)

The individual assets of this company have a total fair value of $700,000 but a reorganization value of $760,000. Thus, an intangible asset (Goodwill) equal to the $60,000 must be recognized.

In addition, the retained earnings deficit must be eliminated and all other asset and liability accounts adjusted to the value on the day that the company exits from bankruptcy.

Because common stock was transferred directly from the previous owners to the creditors, no entry is needed for the stock account. However, because the reorganization value is $760,000 but liabilities are $300,000, stockholders’ equity must be $460,000. Since retained earnings will be zero and common stock will remain $330,000, additional paid-in capital should be adjusted to $130,000.

Receivables ($90,000 - $80,000) .................................... 10,000Inventory ($210,000 - $200,000)...................................... 10,000Buildings ($400,000 - $300,000)...................................... 100,000Goodwill ........................................................................... 60,000

Retained Earnings (eliminate deficit).................. 70,000Additional Paid-in Capital

($130,000 – $20,000)........................................ 110,000

33.(15 Minutes) (Prepare income statement for company going through a bankruptcy reorganization)

ADDISON CORPORATIONIncome Statement

Revenues ........................................................................ $ 467,000Costs and expenses:

Cost of goods sold .................................................... $ 211,000Rent expense ............................................................. 16,000Salary expense .......................................................... 70,000Depreciation expense ............................................... 22,000Advertising expense ................................................. 24,000Interest expense ........................................................ 4,000 (347,000)

Earnings before reorganization items and tax effects. 120,000

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Reorganization items:Loss on closing of branch ...................................... (109,000)Professional fees ...................................................... (71,000)Interest revenue ......................................................... 32,000 (148,000)

Loss before income tax benefit .................................... (28,000)Income tax benefit (20 percent) .................................... 5,600

Net loss ..................................................................... $(22,400)

34.(15 Minutes) (Description of balance sheet for a company emerging from bankruptcy reorganization)

a. SOP 90-7 holds that a company should be considered a new entity (so that current values would be applicable for reporting purposes) if two criteria are met. Otherwise, the company is simply considered to be a continuation of the old concern, a company that should continue to report its historical cost figures.

The first criterion is that the fair value of the assets of the emerging company must be less than the allowed claims as of the date of the order for relief (plus liabilities incurred during reorganization).

The second criterion is that the original owners must be left with less than 50 percent of the voting stock of the emerging company.

Whenever both of these criteria are met, the company's assets should be reported at current values.

b. Under fresh start accounting, the assets of the company are adjusted to current value on the date that it successfully emerges from bankruptcy reorganization. A reorganization value for the entity’s assets as a whole is first determined by discounting the cash flows that are anticipated. This balance is assigned to identifiable assets (both tangible and intangible) in the same manner as in a purchase combination. Any amount of the reorganization value that exceeds the assigned total is recorded as goodwill.

c. The reorganization value in excess of the value of the identified assets and liabilities is reported as the intangible asset goodwill. Goodwill is reviewed each year for impairment.

35. (15 Minutes) (Prepare a balance sheet for a company in bankruptcy reorganization)

JAEZ CORPORATIONBalance Sheet

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December 31, 2010Current assets:

Cash ........................................................................... $ 23,000Inventory .................................................................... 45,000 $ 68,000

Land, buildings, and equipment:Land ........................................................................... 140,000Buildings .................................................................... 220,000Equipment................................................................... 154,000 514,000

Total assets .......................................................... $582,000

Liabilities not subject to compromiseCurrent liabilities:

Accounts payable ................................................ $ 60,000Long-term liabilities:

Note payable (due 2012) ................ $110,000Note payable (due 2013) ................ 100,000 210,000 $ 270,000

Liabilities subject to compromiseAccounts payable ...................................................... 123,000Accrued expenses ..................................................... 30,000Income taxes payable ............................................... 22,000Note payable (due 2015) ........................................... 170,000 345,000

Total liabilities....................................................... 615,000

Stockholders' equityCommon stock .......................................................... 200,000Retained earnings (deficit) ....................................... (233,000)

Total liabilities and shareholders' (deficit) ........ $ 582,000

36.(40 Minutes) (Prepare journal entries for company emerging from bankruptcy using fresh start accounting)

Preliminary computations:BOOK VALUES PRIOR TO EMERGING FROM REORGANIZATION—Total assets at book value = $710,000 ($100,000 + $112,000 + $420,000 +

$78,000)—Total liabilities at book value = $800,000 ($80,000 + $35,000 + $100,000 +

$200,000 + $185,000 + $200,000)—Total common stock = $240,000 (given) —Deficit = $330,000 (given)—Since the above accounts balance, no additional paid-in capital must exist at

this time.

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BOOK VALUES AFTER EMERGING FROM REORGANIZATION—Total assets = $780,000 (reorganization value)—Total liabilities = $340,000 ($5,000 + $4,000 + $100,000 + $50,000 + $71,000 +

$110,000)—Total common stock = $240,000 (all 18,000 returned shares are reissued)—Deficit = -0- (eliminated by the reorganization)—Additional paid-in capital = $200,000 (figure needed to balance above accounts

after reorganization)—Because the company will have 30,000 shares outstanding after the

reorganization, the additional paid-in capital equals $6.66 per share ($200,000/30,000)

—Because the company has a reorganization value of $780,000 but the assets have a market value of only $735,000, goodwill of $45,000 must be recognized

JOURNAL ENTRIES— Land and buildings ................................................... 80,000

Goodwill ..................................................................... 45,000Accounts receivable ............................................ 20,000Inventory ............................................................... 22,000Equipment ............................................................ 13,000Additional paid-in capital (to balance) ............... 70,000

To adjust accounts to market value as part of freshstart accounting.

— Common stock .......................................................... 144,000Additional paid-in capital .................................... 144,000

To record shares turned in to the company by theowners as part of the reorganization plan, 18,000shares at an $8 per share par value.

36. (continued)

— Accounts payable ...................................................... 80,000Note payable ......................................................... 5,000Common stock ($8 per share par value) ............ 8,000Additional paid-in capital ($6.66 per share—see

above, or 1/30 of company total) .................. 6,666Gain on debt discharge ....................................... 60,334

To record settlement of accounts payable.

— Accrued expenses .................................................... 35,000Note payable ......................................................... 4,000Gain on debt discharge ....................................... 31,000

To record settlement of accrued expenses.

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— Note payable ............................................................. 200,000Note payable ......................................................... 50,000Common stock ($8 per share par value) ............ 80,000Additional paid-in capital ($6.66 per share—see

above, or 1/3 of company total) .................... 66,667Gain on debt discharge ....................................... 3,333

To record settlement of note payable due in 2013.

— Note payable .............................................................. 185,000Note payable ......................................................... 71,000Common stock ($8 per share par value) ............ 56,000Additional paid-in capital ($6.66 per share—see

above, or 7/30 of company total) .................. 46,667Gain on debt discharge ....................................... 11,333


— Note payable ............................................................. 200,000Note payable ......................................................... 110,000Gain on debt discharge ....................................... 90,000


— Additional paid-in capital ($334,000 – $200,000) .... 134,000Gain on debt discharge ........................................... 196,000

Retained earnings (deficit) .................................. 330,000To adjust additional paid-in capital to appropriate balance, close out gain, and eliminate deficit balance as part of fresh start accounting.

37.(25 Minutes) (Prepare a balance sheet for a company emerging from bankruptcy reorganization)

a. Smith Corporation must apply fresh start accounting because it meets both requirements established by SOP 90-7:

The reorganization value of $800,000 of the company is less than the allowed claims of $730,000 ($180,000 + $200,000 + $350,000) plus the liabilities incurred following the order for relief of $97,000.

The original owners are left with less than 50 percent (40 percent actually) of the voting stock.

b. Because the company has a reorganization value of $800,000 but only $653,000 can be assigned to specific assets based on market value, the remaining $147,000 is reported as Goodwill.

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SMITH CORPORATIONBalance Sheet

December 31, 2010ASSETS

Current Assets:Accounts receivable ................................................. $ 18,000Inventory .................................................................... 111,000 $129,000

Land, Buildings, and Equipment:Land and buildings ................................................... 278,000Machinery ................................................................... 121,000 399,000

Intangible Assets:Patents........................................................................ 125,000Goodwill ..................................................................... 147,000 272,000

Total Assets .......................................................... $800,000LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:Accounts payable ...................................................... $ 97,000

Long-term Liabilities:Note payable (due in 2 years) .................................. $ 35,000Note payable (due in 5 years) .................................. 50,000Note payable (due in 8 years) .................................. 100,000 185,000

Total Liabilities ..................................................... $282,000Stockholders' Equity:

Common stock (par value) ....................................... $500,000Additional paid-in capital (balancing figure) .......... 18,000Retained earnings ..................................................... - 0 - 518,000

Total Liabilities and Stockholders' Equity ......... $800,000

38.(15 Minutes) (Distribution of assets in a liquidation)

Free assets: (liquidation value)Other assets ............................................................... $ 81,000Assets pledged with fully secured creditors in

excess of debt ...................................................... 45,000Total free assets ................................................... $126,000

Free assets after paying liabilities with priority($126,000 – $36,000) ....................................................... $ 90,000

Unsecured debts:Accounts payable....................................................... $283,000Partially secured liabilities in excess of pledged assets

($180,000 – $103,000) ........................................... 77,000

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Total unsecured debts ........................................ $360,000

Percentage of unsecured debts to be paid: $90,000/$360,000 = 25%—Liabilities with priority collect the entire amount of $36,000—Fully secured liabilities collect the entire amount of $200,000—Partially secured liabilities collect $103,000 from the pledged assets and 25%

of the remaining $77,000 ($19,250) for a total of $122,250.—Unsecured liabilities collect 25% of the $283,000 balance or $70,750.

39.(35 Minutes) (Prepare a statement of financial affairs)

LIMESTONE COMPANYStatement of Financial Affairs

June 3, 2010

Available forBook Unsecured

Values Assets CreditorsPledged with Fully Secured Creditors:

$400,000 Land and buildings $310,000Less: Notes payable-long-term (190,000) $120,000

Pledged with Partially Secured Creditors:180,000 Equipment $130,000

Notes payable—current (250,000) -0-

Free Assets:3,000 Cash ................................................................. 3,00065,000 Accounts receivable ....................................... 26,00088,000 Inventory ......................................................... 80,000

Total amount available to pay liabilitieswith priority and unsecured creditors...... $229,000

Less: Liabilities with priority(listed below).............................................. (42,000)

Available for unsecured creditors ................ $187,000 Estimated deficiency....................................... 21,000$736,000 $208,000

39. (continued)Unsecured—

Book NonpriorityValues Liabilities and Stockholders' Equity Liabilities

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Liabilities with Priority:Administrative expenses ................$ 18,000

$ 10,000 Salaries payable ............................... 10,000Taxes payable ................................... 14,000Total ...................................................$ 42,000

Fully Secured Creditors:190,000 Notes payable - long-term ..............$190,000

Less: Land and buildings ................(310,000) -0-

Partially Secured Creditors:250,000 Notes payable current .....................$250,000

Less: Equipment...............................(130,000) $120,000

Unsecured Creators:88,000 Accounts payable (other than salaries) 88,000

198,000 Stockholders' equity....................................... - 0 - $736,000 $208,000

40.(25 Minutes) (Distribution of assets in a liquidation)Free Assets:

Cash ................................................................................................ $ 6,000Accounts Receivable ..................................................................... 18,000Inventory ......................................................................................... 31,000Investments ..................................................................................... 8,000Land Value In Excess of Related Debt ($72,000 – $65,000) ....... 7,000

Total ........................................................................................... $ 70,000Liabilities With Priority:

Administrative Expenses (estimated) ........................................... $ 22,000Salaries Payable .............................................................................. 6,000Taxes Payable ................................................................................. 10,000

Total ........................................................................................... $ 38,000Free Assets After Payment of Liabilities With Priority

($70,000 – $38,000) ....................................................................... $ 32,000Unsecured Liabilities:

Notes Payable (in excess of value of buildings) ......................... $ 10,000Bonds Payable (in excess of value of equipment) ...................... 80,000Accounts Payable ........................................................................... 70,000

Total ........................................................................................... $160,000Percentage of Unsecured Liabilities To Be Paid: $32,000/$160,000 = 20%

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Payment on the $65,000 of notes payable secured by land will be made in total since the value of the land is greater than the debt.Payment on Notes Payable (secured by buildings):Value of Security (building) ................................................................. $ 68,00020% of Remaining $10,000 .................................................................. 2,000

Total Collected by holders ............................................................. $ 70,000Payment on Bonds Payable:Value of Security (equipment) ............................................................ $ 35,00020% of Remaining $80,000 .................................................................. 16,000

Total Collected by holders ............................................................. $ 51,000Payment on Accounts Payable (unsecured):20% of $70,000 ..................................................................................... $ 14,000Payment of Salaries Payable:As a liability with priority, the entire amount due is paid. $ 6,000Payment of Taxes Payable:As a liability with priority, the entire amount due is paid. $ 10,000Payment of Administrative Expenses:As a liability with priority, the entire amount due is paid. $ 22,000

41.(20 Minutes) (Reporting of a reorganization and a liquidation)

a. Since the land's net realizable value is less than the amount of the note payable, the debt will be reported on a statement of financial affairs as a liability owed to "partially secured creditors." The $80,000 obligation is disclosed in this manner and then reduced by the $48,000 anticipated cash proceeds. The remaining $32,000 balance will be shown by Anteium as an unsecured nonpriority liability.

The land is still reported as an asset, one pledged with partially secured creditors. The $31,000 cost is revealed within the statement of financial affairs although this information is not considered relevant in a liquidation. The $48,000 net realizable value is reported but is offset by the $80,000 liability; thus, no cash will be available to unsecured creditors unless a greater amount is generated by the sale.

b. Fresh start accounting must be used because the reorganization value is less than the debts and the original owners are left with less than 50 percent of the voting stock.After the reorganization, the assets will be reported at $82,000 with one $5,000 debt. Since the common stock has a total par value of $40,000, additional paid-in capital must be $37,000.

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— Land ........................................................................... 17,000Investments ............................................................... 5,000Goodwill...................................................................... 9,000

Additional paid-in capital .................................... 31,000To adjust asset values to fair market value (a total of $73,000) with a Goodwill asset established to bring the total up to $82,000 reorganization value.

— Note payable .............................................................. 80,000Additional paid-in capital (60% of company total) 22,200Gain on discharge of debt .................................. 57,800

To record issuance of stock to bank in settlement ofdebt.

— Accounts payable ...................................................... 20,000Note payable ......................................................... 5,000Gain on discharge of debt .................................. 15,000

To record settlement of accounts payable for 3-year note.

41. (continued)

— Gain on discharge of debt ........................................ 72,800Additional paid-in capital ......................................... 16,200

Retained earnings (deficit) .................................. 89,000To reduce additional paid-in capital balance to correct figure, to close out gain account, and to eliminate deficit as a step in establishing fresh start accounting.

c. The bank will collect a total of $59,000. Obviously, the $50,000 proceeds generated by the land sale must go to the bank with the remaining $30,000 obligation then being ranked as an unsecured-nonpriority liability. Anteium (the insolvent company) will have $15,000 of the $26,000 cash left after paying the $11,000 administrative expenses. Unsecured debts total $50,000 ($30,000 from the note and $20,000 of accounts payable). Thus, 30% of these debts will be paid ($15,000/$50,000). The bank collects an additional $9,000 ($30,000 x 30%); the accounts payable collect $6,000 ($20,000 x 30%).

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42.(25 Minutes) (Prepare a statement of realization and liquidation)a. LITZ CORPORATION

Statement of Realization and LiquidationStock-

Liabilities Fully Partially Unsecured holders'Noncash with Secured Secured Nonpriority Equity

Cash Assets Priority Creditors Creditors Liabilities (Deficits)

Balances, 8/8/10 $ 16,000 $763,000 -0- $259,000 $132,000 $150,000 $238,000Investments sold 39,000 (32,000) 7,000Inventory sold 48,000 (69,000) (21,000)Payment is made on note from proceeds of auction (48,000) (48,000)Remaining debt is reclassified (84,000) 84,000Administrative expenses incurred $15,000 (15,000)Land and buildings all sold 315,000 (370,000) (55,000)Payment is made on note from

proceeds of sale (259,000) (259,000)Reclassify liabilities with priority 34,000 (34,000)Equipment sold 84,000 (210,000) (126,000)Receivables collected 34,000 (82,000) (48,000)Administrative expenses paid (15,000 ) (15,000 ) Final balances remaining for unsecured creditors $214,000 - 0 - $34,000 - 0 - - 0 - $200,000 $(20,000 )

b. Total amount available to payliabilities with priority andunsecured creditors (see part a) $214,000

Less: liabilities with priority (34,000 ) Available for unsecured creditors $180,000Percentage of claim to be received by each unsecured creditor ($180,000/$200,000) 90%

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43.(40 Minutes) (Prepare journal entries for company emerging from bankruptcy using fresh start accounting)

Company must use fresh start accounting because the reorganization value of $650,000 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 = $637,000 (reorganization value of $650,000 plus proceeds from

sale of stock of $77,000 less $90,000 value of land and investments used to settle two debts)

—Total liabilities = $350,000 ($130,000 + $40,000 + $180,000)—Total common stock = $160,000 (10,000 additional shares are issued with a

$10 per share par value so that total outstanding shares = 16,000)—Deficit = -0- (eliminated by the reorganization)—Additional paid-in capital = $127,000 (figure needed to balance above

accounts after reorganization)—Because the company has a reorganization value of $650,000 but the assets

have a market value of only $623,000, Goodwill must be established for $27,000.

JOURNAL ENTRIES—Investments ................................................................. 14,000

Land ............................................................................. 23,000Buildings ..................................................................... 52,000Goodwill ....................................................................... 27,000

Accounts receivable ............................................. 20,000Inventory ................................................................ 16,000Equipment .............................................................. 31,000Additional paid-in capital (to balance)................. 49,000

To adjust accounts to market value as part of freshstart accounting.

—Cash ........................................................................... 77,000Common stock ($10 par value) ........................... 70,000Additional paid-in capital .................................... 7,000

To record shares sold to new investor.

—Cash ............................................................................. 40,000Investments .......................................................... 40,000

Investments sold.

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43. (continued)

—Notes payable—current .............................................. 220,000Cash ......................................................................... 40,000Notes payable (due in 2014) .................................. 130,000Gain on discharge of debt ..................................... 50,000

To record settlement of current notes.

—Accounts payable ....................................................... 129,000Notes payable (due in 2011) .................................. 40,000Gain on discharge of debt ..................................... 89,000

To record settlement of accounts payable.

—Notes payable (due in 2013) ....................................... 325,000Land ......................................................................... 50,000Notes payable (due in 2017) .................................. 180,000Common stock ($10 par value) ............................. 30,000Additional paid-in capital

(3/16 of total computed above) ........................... 23,813Gain on discharge of debt ..................................... 41,187

To record settlement of long-term debt.

—Gain on debt discharge .............................................. 180,187Additional paid-in capital ($127,000 – $79,813) . . . 47,187Retained earnings (deficit) .................................... 133,000

To adjust additional paid-in capital to appropriate balance, close out gain, and eliminate deficit balance as part of fresh start accounting.

44.(40 Minutes) (Prepare statement of financial affairs, determine amounts to be paid in liquidation)

a. OREGON CORPORATIONStatement of Financial Affairs



$33,000 Land (Plots A and D) $43,000Less: Notes payable (30,000) $13,000Pledged with Partially Secured Creditors:

28,000 Land (Plots B and C) $25,000Less: Notes payable (30,000) -0-Free Assets:

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6,000 Cash 6,00025,000 Accounts receivable 12,000

Total available to pay liabilities withpriority and unsecured creditors $31,000

Less: Liabilities with priority (listed below) 28,000

Available for unsecured creditors $ 3,000 Estimated deficiency 47,000

$92,000 $50,000Unsecured—

Book NonpriorityValues Liabilities and Stockholders' Equity Liabilities

Liabilities with Priority:-0- Administrative expenses (estimated) $16,000

$12,000 Salaries payable 12,000Total (above) $28,000Fully Secured Creditors:

30,000 Notes payable $30,000Land (Plots A and D) (43,000) -0-Partially Secured Creditors:

30,000 Notes payable $30,000Land (Plots B and C) (25,000) $ 5,000Unsecured Creditors:

25,000 Notes payable 25,000 20,000 Accounts payable (less salaries

shown above) 20,000(25,000)* Stockholders' equity $92,000 $50,000

*Derived as a balancing figure.

44. (continued)

b. According to the statement of financial affairs prepared above, $3,000 cash should be available for unsecured nonpriority creditors. Unfortunately, $50,000 in unsecured nonpriority liabilities exist. Thus, only 6% of these claims will be covered ($3,000/$50,000).

Cash of $11,240 will be paid on the note payable that is secured by plot B. The land is to be sold for $11,000 leaving a $4,000 unsecured debt. Since 6% of this amount is expected to be paid, the holder will only receive an additional $240.

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c. As indicated in part b, only 6% of the unsecured nonpriority claims can be satisfied. Thus, just $1,500 will be paid on the unsecured $25,000 note payable.

d. Selling plot D for $30,000 rather than $27,000 generates an additional $3,000 in available cash. The statement of financial affairs produced above would then report $6,000 as the amount available for unsecured nonpriority claims or 12% of the total ($6,000/$50,000). After plot B is sold for $11,000, the remaining $4,000 of this note is classified as an unsecured nonpriority liability. Since 12% of this amount is to be paid, an additional $480 is transferred to the holder of the note for a total of $11,480.

45.(40 Minutes) (Prepare a statement of financial affairs)LYNCH, INC.

Statement of Financial AffairsMarch 14, 2010



$40,000 Land and building $75,000Less: Notes payable (70,000) $5,000

Pledged with Partially Secured Creditors:14,000 Equipment $19,000

Less: Notes payable (150,000) -0-

Free Assets:1,000 Cash 1,000

25,000 Accounts receivable 15,000100,000 Inventory 33,000

15,000 Investments 21,000Total available to pay liabilities with

priority and unsecured creditors $75,000 Less: Liabilities with priority (listed below) (22,000)

Available for unsecured creditors $53,000 Estimated deficiency 115,000

$195,000 $168,00045. (continued)

Unsecured—Book Nonpriority

Values Liabilities and Stockholders' Equity LiabilitiesLiabilities with Priority:

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-0- Administrative expenses (estimated) $16,000$5,000 Salaries payable 5,000

1,000 Payroll taxes payable 1,000Total (above) $22,000Fully Secured Creditors:

70,000 Notes payable $70,000Land and building (75,000) -0-Partially Secured Creditors:

150,000 Notes payable $150,000Equipment (19,000) $ 131,000Unsecured Creditors:

33,000 Accounts payable 33,000 4,000 Advertising payable 4,000

(68,000 ) Stockholders' equity $195,000 $168,000

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'1'46. (30 Minutes) (Prepare a statement of realization and liquidation) a. LYNCH, INC.

Statement of Realization and LiquidationMarch 14, 2010 to July 23, 2010

Stock-Liabilities Fully Partially Unsecured holders'

Noncash with Secured Secured Nonpriority EquityCash Assets Priority Creditors Creditors Liabilities (Deficits

Book balances, 3/14/10Answer from Problem 45 $ 1,000 $194,000 $6,000 $70,000 $150,000 $ 37,000 $(68,000)

Accounts receivable collected—remaining balance assumedto be uncollectible 18,000 (25,000) (7,000)

Inventory sold 40,000 (100,000) (60,000)Accounts payable discovered 10,000 (10,000)Land and buildings all sold 71,000 (40,000) 31,000Fully secured note paid (70,000) (70,000)Equipment sold 11,000 (14,000) (3,000)Payment made on partially

secured debt (11,000) (11,000)Investments sold 21,000 (15,000) 6,000Administrative expenses accrued 20,000 (20,000)Remaining partially secured

claims reclassified asunsecured liabilities _______ (139,000) 139,000

Final balances remaining forunsecured creditors $81,000 - 0 - $26,000 - 0 - - 0 - $186,000$(131,000 )

b. The statement of realization and liquidation prepared in (a) indicates that $81,000 in cash remains. However, $26,000 of this amount must be distributed to the liabilities with priority leaving only $55,000 for the unsecured nonpriority creditors. Since these unsecured liabilities amount to $186,000, only 30% (rounded) ($55,000/$186,000) of each debt will be paid. Thus, a creditor holding a $1,000 claim will receive approximately $300.

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47.(30 Minutes) (Prepare Journal entries for company emerging from bankruptcy using fresh start accounting)

The 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])

—Total liabilities = $118,000 ($18,000 + $70,000 + $30,000)—Total common stock = $105,000 (11,000 additional shares are issued with a

$5 per share par value – total outstanding shares = 21,000)—Deficit = -0- (eliminated by the reorganization)—Additional paid-in capital = $25,200 (figure needed to balance above

accounts after reorganization)

JOURNAL ENTRIES— Goodwill ..................................................................... 15,000

Additional paid-in capital .................................... 15,000To adjust to total reorganization value as part of freshstart accounting ($225,000 – $210,000).

— Salary payable ........................................................... 18,000Note payable—1 year ........................................... 18,000

To record note issued for accrued salaries.

— Notes payable ............................................................ 140,000Note payable—6 years ......................................... 30,000Common stock ($5 par value) ............................. 25,000Additional paid-in capital (5/21 of total computed above) ........................ 6,000Gain on discharge of debt .................................. 79,000

To record settlement of partially secured debt.

— Cash ............................................................................ 36,000Common stock ($5 par value) ............................. 30,000Additional paid-in capital .................................... 6,000

To record shares sold to new investor.

— Notes payable ............................................................ 50,000Accounts payable ...................................................... 10,000

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Accrued expenses ..................................................... 4,000Cash ...................................................................... 12,800Gain on discharge of debt .................................. 51,200

To record payment of unsecured debts—20% paymentmade.

— Gain on debt discharge ............................................ 130,200 Additional paid-in capital ($27,000 – $25,200) ........ 1,800

Retained earnings (deficit) .................................. 132,000To adjust additional paid-in capital to appropriate balance, close out gain, and eliminate deficit balance as part of fresh start accounting.

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. Therefore, the student has the opportunity to make use of the SEC website 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. The advantages of filing under Chapter 11. The appointment of creditor committees. The development of a reorganization plan. Steps in a Chapter 11 reorganization, especially those that involve the

SEC. Conveyance of information about a bankruptcy. Voting on a reorganization plan. The effect on stockholders and bondholders. The steps of a Chapter 7 liquidation. Sources of additional information for a specific bankruptcy case.

Research Case 2

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This assignment provides the student with the chance to work with actual data from a real company. Thus, the student can get the feel for the process of retrieving information of interest about a company that is going through bankruptcy. In addition, this assignment can help the student appreciate the frustration that sometimes comes about when analyzing financial statements. Textbooks often have information laid out for the student so that analysis may resemble a “connect the dots” assignment. In reality, pages and pages of data are often available that require slow and meticulous study. Notice here the length of time that this bankruptcy has taken and the number of plans that have been put forth and discussed.

Here is the actual note supplied by the company which can serve as the basis for considerable class discussion.

1. Basis of Presentation: The Consolidated Financial Statements of Congoleum Corporation (the “Company” or “Congoleum”) have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, the financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. As described more fully below, there is substantial doubt about the Company's ability to continue as a going concern unless it obtains relief from its substantial asbestos liabilities through a successful reorganization under Chapter 11 of the Bankruptcy Code.

On December 31, 2003, Congoleum filed a voluntary petition with the Bankruptcy Court (Case No. 03-51524) seeking relief under Chapter 11 of the Bankruptcy Code as a means to resolve claims asserted against it related to the use of asbestos in its products decades ago. During 2003, Congoleum had obtained the requisite votes of asbestos personal injury claimants necessary to seek approval of a proposed, pre-packaged Chapter 11 plan of reorganization. In January 2004, the Company filed its proposed plan of reorganization and disclosure statement with the Bankruptcy Court. In November 2004, Congoleum filed the Fourth Plan with the Bankruptcy Court reflecting the result of further negotiations with representatives of the ACC, the FCR and other asbestos claimant representatives. The Bankruptcy Court approved the disclosure statement and plan voting procedures in December 2004 and Congoleum obtained the requisite votes of asbestos personal injury claimants necessary to seek approval of the Fourth Plan. In April 2005, Congoleum announced that it had reached an agreement in principle with representatives of the ACC and the FCR to make certain modifications to its proposed plan of reorganization and related documents governing the settlement and payment of asbestos-related claims against Congoleum. Under the agreed-upon modifications, asbestos claimants with claims settled under Congoleum's pre-petition settlement agreements would

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agree to forbear from exercising the security interest they were granted and share on a pari passu basis with all other present and future asbestos claimants in insurance proceeds and other assets of the Plan Trust to pay asbestos claims against Congoleum. In July 2005, Congoleum filed the Sixth Plan and related documents with the Bankruptcy Court which reflected the result of these negotiations, as well as other technical modifications. The Bankruptcy Court approved the disclosure statement and voting procedures and Congoleum commenced solicitation of acceptances of the Sixth Plan in August 2005. In September 2005, Congoleum learned that certain asbestos claimants were unwilling to agree to forbear from exercising their security interest as contemplated by the Sixth Plan and the Sixth Plan was subsequently withdrawn.

In November 2005, the Bankruptcy Court denied a request to extend Congoleum’s exclusive right to file a plan of reorganization and solicit acceptances thereof. In March 2006, Congoleum filed the Eighth Plan. In addition, CNA filed a plan of reorganization and the Bondholders’ Committee also filed a plan of reorganization. In May 2006, the Bankruptcy Court ordered all parties in interest in Congoleum’s reorganization proceedings to participate in global mediation discussions. Numerous mediation sessions took place from June through September 2006. During the initial mediation negotiations, Congoleum reached an agreement in principle, subject to mutually agreeable definitive documentation, with the ACC, the FCR and the Company’s controlling shareholder, ABI, on certain terms of the Ninth Plan, which Congoleum filed and proposed jointly with the ACC in August 2006. CNA and the Bondholders’ Committee jointly filed a new, competing plan in August 2006 and each withdrew its prior plan of reorganization. Following further mediated negotiations, Congoleum, the ACC, the FCR, ABI and the Bondholders’ Committee reached agreement on the terms of the Tenth Plan, which Congoleum filed jointly with the ACC in September 2006. Following the Bondholders’ Committee’s withdrawal of support for CNA’s plan, CNA filed the CNA Plan. In October 2006, Congoleum and the ACC jointly filed the Eleventh Plan, a revised version of the Tenth Plan which reflected minor technical changes agreed to by the various parties supporting Congoleum’s plan. In October 2006, the Bankruptcy Court held a hearing to consider the adequacy of the disclosure statements with respect to the Tenth Plan and the CNA Plan and to hear arguments on respective summary judgment motions as to whether the Tenth Plan and the CNA Plan were confirmable as a matter of law. The Bankruptcy Court provisionally approved the disclosure statements for both the Tenth Plan and the CNA Plan subject to the Bankruptcy Court’s ruling on the respective summary judgment motions. In February 2007, the Bankruptcy Court issued two separate opinions ruling that the Tenth Plan and the CNA Plan were not confirmable as a matter of law. In March 2007, Congoleum resumed global plan mediation discussions with the various parties seeking to resolve the issues raised in the Bankruptcy Court’s ruling with respect to the Tenth Plan. In July 2007, the FCR filed a plan of reorganization and proposed

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disclosure statement. After extensive further mediation sessions, in February 2008 the FCR, the ACC, the Bondholders’ Committee and Congoleum jointly filed the Joint Plan. The Bankruptcy Court approved the disclosure statement for the Joint Plan in February 2008, and the Joint Plan was solicited in accordance with court-approved voting procedures. Various objections to the Joint Plan were filed, and in May 2008 the Bankruptcy Court heard oral argument on summary judgment motions relating to certain of those objections. In June 2008, the Bankruptcy Court issued a ruling that the Joint Plan was not legally confirmable, and issued an Order to Show Cause why the case should not be converted or dismissed pursuant to 11 U.S.C. § 1112. Following a further hearing in June 2008, the Bankruptcy Court issued an opinion that vacated the Order to Show Cause and instructed the parties to propose a confirmable plan by the end of calendar year 2008. Following further negotiations, the Bondholders’ Committee, the ACC, the FCR, representatives of holders of pre-petition settlements and Congoleum reached an agreement in principle which the Company believes addresses the issues raised by the Bankruptcy Court in the ruling on the Joint Plan and in the court's prior decisions. A term sheet describing the proposed material terms of the Amended Joint Plan and the Litigation Settlement was signed by the parties to the agreement and filed with the Bankruptcy Court in August 2008 and reported by Congoleum on Form 8-K filed in August 2008. Certain insurers and a large bondholder filed objections to the Litigation Settlement and incorporated by reference herein and/or reserved their rights to object to confirmation of the Amended Joint Plan. The Bankruptcy Court approved the Litigation Settlement following a hearing in October 2008, but the court reserved until a later date a determination of whether the settlement meets the standards required for confirmation of a plan of reorganization. The Amended Joint Plan was filed with the Bankruptcy Court in November 2008. In January 2009, First State Insurance Company and Twin City Fire Insurance Company filed a motion for summary judgment seeking denial of confirmation of the Amended Joint Plan on several discrete issues, and a hearing was held on February 5, 2009. On February 26, 2009, the Bankruptcy Court rendered an opinion denying confirmation of the Amended Joint Plan. Pursuant to the opinion, the Bankruptcy Court entered the Order of Dismissal dismissing Congoleum’s bankruptcy case.

On February 27, 2009, Congoleum and the Bondholders’ Committee appealed the Order of Dismissal and the summary judgment ruling denying plan confirmation to the U.S. District Court for the District of New Jersey. On March 3, 2009, an order was entered by the Bankruptcy Court granting a stay of the Order of Dismissal pending entry order a final non-appealable decision affirming the Order of Dismissal.

There can be no assurance that the Amended Joint Plan or any other plan will receive the acceptances necessary for confirmation, that the Amended Joint Plan will not be modified further, that the Amended Joint Plan or any other plan will

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receive necessary court approvals from the Bankruptcy Court and the District Court, that the District Court will reverse the Order of Dismissal or Summary Judgment ruling, or that such approvals and appellate decisions will be received in a timely fashion, that any plan will be confirmed, that any plan, if confirmed, will become effective, or that there will be sufficient funds to pay for continued litigation over any plan of reorganization. It also is unclear whether any other person might successfully propose and confirm a plan or what any such plan, when confirmed, would ultimately provide, and whether the Bankruptcy Court would approve such a plan. Any plan of reorganization pursued by the Company will be subject to numerous conditions, approvals and other requirements, including Bankruptcy Court and District Court approvals, and there can be no assurance that such conditions, approvals and other requirements will be satisfied or obtained.

For more information regarding the Company’s asbestos liability and plan for resolving that liability, please refer to Note 17 of the Notes to Consolidated Financial Statements.

American Institute of Certified Public Accountant Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7") provides financial reporting guidance for entities that are reorganizing under the Bankruptcy Code. The Company implemented this guidance in its consolidated financial statements for periods after December 31, 2003.

Pursuant to SOP 90-7, companies are required to segregate pre-petition liabilities that are subject to compromise and report them separately on the balance sheet. Liabilities that may be affected by a plan of reorganization are recorded at the amount of the expected allowed claims, even if they may be settled for lesser amounts. Substantially all of the Company’s liabilities at December 31, 2003 have been reclassified as liabilities subject to compromise. Obligations arising post-petition, and pre-petition obligations that are secured, are not classified as liabilities subject to compromise.

Additional pre-petition claims (liabilities subject to compromise) may arise due to the rejection of executory contracts or unexpired leases, or as a result of the allowance of contingent or disputed claims.

Analysis Case 1

Students may look up any one of a number of companies that have emerged recently from bankruptcy reorganization. The type of results that will be found

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will be based on the specific company. One company, for example, that has emerged from reorganization is Constar International. Here is a press release obtained at www.constar.net:

Philadelphia, PA - June 1, 2009 -- Constar International Inc., a leading global producer of PET (polyethylene terephthalate) plastic containers for food and beverages, announced that the Company and its affiliated debtors completed their financial restructuring and successfully emerged from Chapter 11 on Friday, May 29, 2009. The reorganization was completed approximately five months from the filing of their Chapter 11 petitions on December 30, 2008. In conjunction with its emergence from Chapter 11, Constar also announced that it had converted its debtor-in-possession financing into an exit facility to provide the Company with ongoing liquidity.

Michael Hoffman, President and Chief Executive Officer of Constar, commented, "On behalf of our Board and the management team, I want to thank our unsecured bond holders for their support and their willingness to restructure our debt. At the same time I want to express my appreciation to our loyal customers, committed suppliers and dedicated employees who have supported us and encouraged us throughout the process. We emerge a revitalized company with an improved balance sheet. Combining our improved financial condition with our strong technologies, we are better positioned than ever to provide our customers with the product quality, innovation and service they have come to expect from Constar."

As required by the Plan approved by the Bankruptcy Court, Constar's old common stock (which has recently traded with the symbol CNSTQ) was cancelled in connection with the emergence from Chapter 11. Holders of the old common stock will not receive a distribution of any kind and no further transfers will be recorded on the Company's books.

In accordance with the Plan, holders of the $175 million of Constar's pre-Petition Subordinated Notes will convert 100% of their face amount into new common stock of the reorganized Company. This common stock is initially expected to trade over-the-counter. The Company estimates that following the distribution of the new shares, there will be approximately 1.75 million shares of the new common stock outstanding (exclusive of approximately 195,000 additional shares reserved for issuance under equity incentive plans).

Cautionary Note Regarding Forward-Looking Statements Except for historical information, all information in this news release consists of forward-looking statements within the meaning of the federal securities laws, including statements regarding the intent, belief or current

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expectations of the Company and its management which are made with words such as "will," "expect," "believe," and similar words. These forward-looking statements involve a number of risks, uncertainties and other factors, which may cause the actual results to be materially different from those expressed or implied in the forward-looking statements. Important factors that could cause the actual results of operations or financial condition of the company to differ from expectations are identified from time to time in the Company's reports filed with the SEC, including the risk factors identified in its Annual Report on Form 10-K for the year ended December 31, 2008, and in subsequent filings made prior to, on or after today. The Company does not intend to review, revise, or update any particular forward-looking statements in light of future events.

A second source of information is the Securities and Exchange Commission. According to the SEC website, using an EDGAR search, Constar International filed a Form 8-K on the same date as the above press release that made public the following:

Item 1.0 1

Entry into a Material Definitive Agreement.

On May 29, 2009 (the “Effective Date”), Constar International Inc. (the “Company”), together with certain of its affiliates (each, a “Debtor” and collectively, the “Debtors”) consummated the transactions contemplated by the Debtors’ Second Amended Joint Plan of Reorganization, as Further Modified, Pursuant to Chapter 11 of the Bankruptcy Code, as confirmed by the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) on May 14, 2009 (as confirmed, the “Plan”).

In connection with the consummation of the Plan, on the Effective Date, the Company’s existing Senior Secured Super-Priority Debtor in Possession and Exit Credit Agreement, dated as of December 31, 2008 (the “Credit Agreement”) was converted into exit financing in accordance with its terms. For a description of the Credit Agreement, reference is made to the description of such agreement in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (the “Commission”) on January 6, 2009, which description is incorporated by reference herein. Also in connection with the consummation of the Plan, the Company and its lenders entered into Amendment No. 2 to the Credit Agreement, primarily for the purposes of updating certain schedules to the Credit Agreement and permitting the Company’s Dutch subsidiary, Constar International Holland (Plastics) B.V., which is neither a party to nor a guarantor of the Credit Agreement, to enter into separate financing

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arrangements. The foregoing is not a complete description of Amendment No. 2 to the Credit Agreement, which is filed as Exhibit 99.1 to this Report and the terms of which are incorporated herein by reference.

Item 1.0 2

Termination of a Material Definitive Agreement.

In connection with the Company’s reorganization and emergence from bankruptcy, all existing shares of the Company’s capital stock were canceled pursuant to the Plan. In addition, in the same connection, all of the Company’s Senior Subordinated 11% Notes Due 2012 were canceled and the related indenture was terminated (except for purposes of allowing the noteholders to receive distributions under the Plan). The holders of the Class 4 Senior Subordinated Note Claims (as defined in the Plan) received 10 shares of new Common Stock per $1,000 face amount of the Senior Subordinated Notes pursuant to the Plan.

In addition, upon the Effective Date, the following incentive plans were terminated (and any and all awards granted under such plans were terminated and will no longer be of any force or effect): (1) the 2007 Non-Employee Directors’ Equity Incentive Plan; (2) the 2007 Stock-Based Incentive Compensation Plan; (3) Constar International Inc. Non-Employee Directors’ Equity Incentive Plan; (4) Constar International Inc. 2002 Stock-Based Incentive Compensation Plan; (5) the Amended and Restated Constar International Inc. Supplemental Executive Retirement Plan; and (6) the Amended and Restated Constar International Inc. Annual Incentive and Management Stock Purchase Plan. The 2007 Incentive Plan was replaced by the Constar International Inc. Annual Incentive Plan, adopted May 26, 2009 (the “AIP”). For a description of the AIP, please see the Company’s Current Report on Form 8-K filed with the Commission on June 1, 2009.

Finally, a search of on-line journals finds a number of articles discussing the bankruptcy reorganization of Constar International including:

“Moody's Lowers PDR of Constar to D; CFR to Ca,” Moody's Investors Service Press Release, December 30, 2008.

“Bottle Maker Constar Files for Bankruptcy,” Plastics News, January 5, 2009.

“Constar International Inc. Receives Delisting Notice from NASDAQ Stock Market,” Business Wire, January 6, 2009.

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“Court Confirms Constar’s Plan of Reorganization,” Business Wire, May 4, 2009.

“Constar International Inc - CNSTQ: Completes Restructuring and Emerges from Chapter 11 Bankruptcy,” Market News Publishing, June 1, 2009.

“Constar International Inc. Completed Its Financial Restructuring and Emerged From Chapter 11,” Business Wire, June 1, 2009.

There are obviously many ways available to investors who are trying to get information about a bankruptcy reorganization plan.

Analysis Case 2

While a company is going through a bankruptcy reorganization, creditors, investors, employees, and other interested parties all want to know the current status of the process. This assignment was designed simply to help students determine what information can be readily gained from a company’s website about a reorganization that is in process. Different companies will undoubtedly provide widely differing amounts of information.

The following (along with a string of press releases) was posted on the Web site of WCI Communities (www.wcicommunities.com):

1. What is Chapter 11?

First and foremost, it does NOT mean that the Company is going out of business. Chapter 11 is a legal mechanism for Court-supervised reorganization or restructuring of a Company’s obligations. Chapter 11 provides a way for companies to address their financial challenges in order to become a viable entity, while continuing day-to-day operations.

2. Why did you file for Chapter 11?

Like other large homebuilders, WCI has been affected by the recent deterioration of the real estate market and general business environment, which in turn has affected the Company’s ability to satisfy various debt covenants.

The Company determined to file Chapter 11 to prevent the consequences of existing defaults under its senior debt facilities and a potential default under its convertible notes indenture, and to ensure that its capital structure would be aligned with the realities of today’s housing market.

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http://www.wcicommunities.com/


3. Do you have enough money to stay in business?

On September 23rd, the Delaware Bankruptcy Court presiding over WCI's Chapter 11 case authorized the Company to enter into a new $150 million debtor-in-possession (DIP) financing agreement. Simultaneously, the Court also granted the Company final authority to continue using its on-hand cash collateral during the Chapter 11 case. As of September 20, 2008, the Company had approximately $68 million of cash on hand.

The DIP agreement, which includes an $80 million term loan and a $70 million revolving credit facility, provides WCI with access to over $100 million of additional liquidity for the operation of its business while it develops a Chapter 11 plan to restructure its balance sheet. Approximately $50 million of the DIP term loan will be used to permanently retire in full the Company's outstanding tower credit facility. The DIP loans were made by a group of financial institutions led by Wachovia Bank, National Association acting as administrative agent and Bank of America, N.A. acting as collateral agent.

4. Does the filing mean you are going out of business?

Absolutely not. We filed for Chapter 11 to preserve and strengthen our business. The filing will give us valuable “breathing space” to address our financial situation while keeping our main focus on the Company’s core business and its future opportunities.

5. What happens during Chapter 11?

The Chapter 11 filing triggers an “automatic stay” which prevents anyone from collecting debts owed by the Company prior to the filing of the Chapter 11 petition, such as payments to creditors and bondholders, unless those creditors are deemed to be secured (such as suppliers who have valid mechanics liens).

Chapter 11 permits, and even encourages, daily operations to continue as usual. We will continue to serve our homebuyers. Employees will continue to be paid. And materials delivered and services performed after the filing date will be paid for in the ordinary course of business.

While business continues, management will work with the Company’s creditors on finalizing a plan to restructure the Company’s obligations. The restructuring plan is called a Plan of Reorganization. When the creditors and the Court accept the plan, it is said to be “confirmed” and at that time WCI Communities emerges from Chapter 11 as a reorganized company.

6. How long will the Company be in Chapter 11?

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It is difficult to speculate on how long the Chapter 11 process will take, but management’s goal is to emerge from the financial restructuring process as soon as possible.

7. Which entities are included in the filing?

Besides WCI Communities Inc., 126 entities are included in the filing. WCI’s real-estate servicing arm, Prudential Florida Realty, WCI Mortgage and certain joint ventures WCI participates in were not included in the filing.

8. Do companies ever emerge from Chapter 11?

Many companies, including Ryan Homes, Delta Airlines, Continental Airlines, Texaco, Macy’s, U-Haul, and 7-Eleven have successfully reorganized under Chapter 11. We expect the same success.

9. Where can I find Chapter 11 case information?

WCI has set up a special Restructuring Information page on the Company website, www.wcicommunities.com, which contains a variety of information on our Chapter 11 restructuring. WCI has also set up a toll-free information hotline for inquiries at (800) 924-1890. Additional information can be found at www.epiqbankruptcysolutions.com. These resources are designed to provide information on the restructuring to suppliers, employees, customers, shareholders and any other interested parties.

10. How can I get a copy of the petitions?

Copies of the Chapter 11 petitions and other documents filed with the Court will be available shortly after the filing at www.wcicommunities.com. The petitions are also accessible at the Court’s website, www.deb.usCourts.gov, through an account obtained from Pacer Service Center at (800) 676-6856. Also see chapter11.epiqsystems.com/wcicommunities.

Communications Case 1

A study of almost any large bankrupt organization can lead to a considerable degree of speculation as to the reasons for the company’s decline. For example, the following articles provide a few examples of the discussions surrounding the struggles of Movie Gallery. Because the company was widely known, its bankruptcy was closely followed by the press.

“Movie Gallery Receives Final Approval of Debtor-In-Possession Financing; Court Also Grants Authority to Perform Under Restructuring

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http://newman.richmond.edu:2058/pqdweb?index=27&did=1382758551&SrchMode=1&sid=4&Fmt=3&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1248790584&clientId=383


http://chapter11.epiqsystems.com/wcicommunities

http://www.deb.uscourts.gov/


http://www.epiqbankruptcysolutions.com/



Agreement with Sopris Capital Advisors,” PR Newswire, November 14, 2007.

“Movie Gallery Files Plan of Reorganization and Disclosure Statement With Support of Major Constituents,” PR Newswire, December 22, 2007.

“Movie Gallery Files Reorganization Plan,” Wall Street Journal, December 26, 2007.

“Movie Gallery Plans Early 2008 Bankruptcy Exit, Home Media Magazine, December 30, 2007-Januarty 5, 2008, p.1.

“Movie Gallery, Inc.; Court Approves Movie Gallery's Disclosure Statement, Investment Weekly News, January 14, 2008. p. 520

“Movie Gallery Gets Reorg Plan Extension,” Home Media Magazine, Feb 3-Feb 9, 2008, p. 4.

“Gallery to Shutter 400 More Stores, Home Media Magazine, Feb 10-Feb 16, 2008, p. 6.

“Movie Gallery Inc.: Sopris to Lend $100 Million To Fund Bankruptcy Exit,” Wall Street Journal, April 9, 2008. p. A.13

“Gallery Exits Bankruptcy; Joe Malugen Out as CEO Erik Gruenwedel.” Home Media Magazine, May 25-May 31, 2008, p. 1

“Movie Gallery out of Chapter 11,” Video Business, May 26, 2008, p. 1.

COMMUNICATIONS CASE 2

This assignment is designed so that the student can work with several practical accounting journals such as the CPA Journal and the Journal of Accountancy. These sources provide a considerable amount of information about the nature of the work that can be performed for a company before, during, and after bankruptcy.

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Chap 013

Documents

Transcript of Chap 013