CH 17

Corporate Liquidations
and Reorganizations
Chapter 17
2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
17 - 1
Learning Objective 1
Understand differences among
types of bankruptcy filings.
17 - 2
Bankruptcy Reform Act of 1978

Prior to 1898, state government legislation
governed bankruptcy procedures.
The 1898 Bankruptcy Act, a federal law,
preempted the state legislation.
The 1898 Act was repealed when Congress
enacted the Bankruptcy Reform Act of 1978.
17 - 3
Bankruptcy Law
The bankruptcy law facilitates debt relief to
individuals and corporations under various
provisions, called chapters.
17 - 4
Types of Bankruptcies
Type
Chapter 7
Liquidation
Chapter 9
Adjustments
of debts of a
municipality
Description
A trustee is appointed to sell off
assets of the individual or company
and pay claims to creditors.
Municipalities (not covered here).
17 - 5
Type
Chapter 11
Reorganization
Description
A debtor corporation is expected to be
rehabilitated and the reorganization of
the corporation is anticipated.
Either a trustee is appointed or the
company performs the duties of a
trustee (debtor in possession).
A plan of reorganization is negotiated.
17 - 6
Type
Chapter 12
Farmers
Chapter 13
Adjustments
of debts of an
individual with
regular income
Description
Family farmers with regular income
(not covered here).
Exclusively applies to individuals,
including sole proprietorships.
Unsecured debts less than $250,000
and secured debts less than $750,000
(not covered here).
17 - 7
Payment of Claims
I. Secured Claims
Claims secured by valid liens.
II. Unsecured Priority Claims
1. Administrative expenses incurred in preserving and
liquidating the estate.
2. Claims incurred between the date of filing and the
date an interim trustee is appointed.
3. Claims for wages, salaries, and commissions.
4. Claims for contributions to employee benefit plans.
5. Claims of individuals regarding property or services.
6. Claims of governmental units (taxes, duties, etc.).
17 - 8
Payment of Claims
III. Unsecured Nonpriority Claims
1. Allowed claims that were timely filed.
2. Allowed claims where proof of claims was filed late.
3. Allowed claims for any fine, penalty, or forfeiture, or
for charges arising prior to the order for relief.
4. Claims for interest on the unsecured priority claims
or the unsecured nonpriority claims.
IV. Stockholders Claims
Remaining assets are returned to the debtor corporation
or its stockholders.
17 - 9
Comprehend trustee
responsibilities and accounting
during liquidation.
2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 10
Duties of the Trustee

in Liquidation Cases
The filing of a case creates an estate.
The trustee takes possession of the estate,
converts the assets into cash, and distributes
the proceeds according to the priority of
claims, as directed by the bankruptcy court.
Statement of Affairs
This statement is a legal
document prepared for the
bankruptcy court.
It emphasizes liquidation value.
Trustee Accounting
The Bankruptcy Act

does not cover
procedural accounting
details.
Trustee Accounting
Statement of Cash Receipts and Disbursements
Statement of Changes in Estate Equity
Balance Sheet
Statement of Realization and Liquidation
Understand financial reporting
during reorganization.
Reorganization
Less than 30% of business bankruptcy cases
are filed under Chapter 11 each year.
A Chapter 11 reorganization case is
initiated voluntarily or involuntarily.
Trustee or Debtor in Possession
A private trustee may be appointed.
The debtor corporation may continue in possession.
The Duties of a Trustee

Including the Following:
Being accountable for the debtors property
Filing a list of creditors, schedules of assets
and liabilities, and a financial statement
Furnishing information to the court
Examining creditor claims for authenticity
Filing a reorganization plan
Filing final papers on the trusteeship
Committee Representation
Creditors committees are responsible

for protecting the interests of the
creditors they represent.
Operating Under Chapter 11
Possible Benefits
Protection of the debtor

in possession allowing
possible cost reductions
Disadvantages
Losing the confidence

of its lenders, suppliers,
customers, and employers
The Plan of Reorganization Must:

Identify class of claims
Specify any class of claims that is not impaired
Specify any class of claims that is impaired
Treat all claims within a particular class alike
Provide adequate means for the plans execution
Prohibit the issuance of nonvoting securities
Prohibit the issuance of nonvoting securities
Financial Reporting During

Reorganization
The reorganization process
can take several years.
The corporation must still prepare
financial statements and filings
for the SEC during this time
period and after it emerges
from reorganization.
Effects of Chapter 11 on the

Balance Sheet
Unsecured liabilities and undersecured

liabilities incurred before the company
entered Chapter 11 are prepetition
liabilities subject to compromise.

Income Statement
Professional fees and similar expenses
related directly to the Chapter 11
proceedings are expensed as incurred.
Reorganization items should be reported.

Statement of Cash Flows
Cash flow items relating to reorganization

are disclosed separately from cash flow
items relating to the ongoing
operations of the business.
Supplementary Combined
Financial Statements
SOP 90-7 requires that condensed combined

financial statements for all entities in
reorganization proceedings be presented
as supplementary financial information.
Understand financial reporting
after emerging from
reorganization including
fresh-start accounting.
Financial Reporting for

the Emerging Company
Ordinarily, a corporate reorganization
involves a restructuring of liabilities and
capital accounts and a revaluation of assets.
For many companies, their reorganization
plan includes the sale of the company.
Reorganization Value
Generally, the reorganization value is
determined by discounting future cash
flows for the reconstituted business
plus the expected proceeds from sale of
assets not required in the new business.
Fresh-Start Reporting
Fresh-start reporting results in
a new reporting entity with no
retained earnings or deficit balance.
The SOP provides two conditions that
must be met for fresh-start reporting:
1. The reorganization value of the emerging
entitys assets immediately before the date of
confirmation of the reorganization plan is less
than the total of all postpetition liabilities
and allowed claims.
2. Holders of existing voting shares immediately
before confirmation of the reorganization plan
receive less than 50% of the emerging entity.
Fresh-Start Reporting Results

in a New Reporting Entity
Allocating the reorganization value
to identifiable assets
Reporting liabilities
Final statement of old entity
Disclosures in initial financial
statements of new entity
Comparative financial statements
Reporting by Entities That Do Not

Qualify for Fresh-Start Reporting
Liabilities are reported at present values
using appropriate interest rates.
Forgiveness of debt should be reported
as an extraordinary item.
Quasi-reorganization accounting is not used.
Illustration of a Reorganization
Case
Tiger Corporation files for protection from
creditors under Chapter 11 on January 5, 2003.
During 2003, no prepetition liabilities are
paid and no interest is accrued on the
bank note or the bonds payable.
Case
The bankruptcy court allows Tiger to invest
$100,000 in new equipment in August 2003.
The new equipment has a useful life of
five years, and is depreciated over a five
year period to the nearest half-year.
Case
Building depreciation: $50,000 per year
Old equipment:
$60,000 per year
Patent amortization: $50,000 per year
Case
(Tiger Balance Sheet)
Current assets
Cash
Accounts receivable, net
Inventory
Other current assets
Plant assets
Land
Building, net
Equipment, net
Patent
$ 50,000
500,000
300,000
50,000
$200,000
500,000
300,000
200,000
$ 900,000
1,200,000
$2,100,000
Case
(Tiger Balance Sheet)
Current liabilities
Accounts payable
$600,000
Taxes payable
150,000
Accrued interest on bonds
90,000
Note payable to bank
260,000
15% bonds payable
(partially secured)
Stockholders deficit
Capital stock
500,000
Deficit
700,000
$1,100,000
1,200,000
200,000
$2,100,000
Reclassification of Liabilities
Subject to Compromise
(000)
Accounts Payable
600
Taxes Payable
150
Accrued Interest on 15% Bonds
90
Note Payable to Bank
260
15% Bonds Payable (partially secured) 1,200
Liabilities Subject to Compromise
To reclassify liabilities subject to compromise
2,300
Income and Retained Earnings

Statement for the Year 2003
Sales
Cost of sales
Wages and salaries
Depreciation and amortization
Other expenses
Earnings before reorganization items
Professional fees related to bankruptcy
Net loss
Beginning deficit
Deficit December 31, 2003
$ 1,000,000
(430,000)
(250,000)
(170,000)
(50,000)
100,000
(450,000
(350,000)
(700,000)
$(1,050,000)
Tiger Balance Sheet

at December 31, 2003
Current assets
Cash
Accounts receivable, net
Inventory
Plant assets
Land
Building, net
Equipment, net
Patent
$150,000
350,000
370,000
50,000
$200,000
450,000
330,000
150,000
$ 920,000
1,130,000
$2,050,000
Tiger Balance Sheet

at December 31, 2003
Current liabilities
Short-term borrowings
Accounts payable
Wages and salaries payable
Liabilities subject to
compromise
Stockholders deficit
Capital stock
Deficit
$ 150,000
100,000
50,000
$ 300,000
2,300,000
500,000
1,050,000
550,000
$2,050,000
The Reorganization Plan

1. Tigers 15% bonds payable were secured with the
land and building. The bondholders agree to accept
$500,000 new common stock, $500,000 senior debt
of 12% bonds and $100,000 cash payable 12/31/03.
2. The priority tax claims of $150,000 will be paid in
cash as soon as the reorganization plan is confirmed.
3. The remaining unsecured, nonpriority, prepetition
claims of $950,000 will be settled as follows:
The Reorganization Plan

a. Creditors represented by the accounts payable
will receive $275,000 subordinated debt and
$140,000 common stock.
b. The $90,000 accrued interest on the 15% bonds
will be forgiven.
c. The $260,000 note payable to the bank will be
exchanged for $120,000 subordinated debt
and $60,000 common stock.
4. Equity holders will exchange their stock for $100,000
common stock of the emerging company.
The reorganization value is compared with the total
postpetition liabilities and court-allowed claims at June 30
to determine if fresh-start reporting is appropriate.
Postpetition liabilities
$ 255,000
Allowed claims subject to compromise
2,300,000
Total liabilities on June 30, 2004
2,555,000
Less: Reorganization value
2,200,000
Excess liabilities over reorganization value
$ 355,000
Proposed Reorganized
Capital Structure
Postpetition liabilities
Taxes payable
Current portion of senior debt,
due December 2004
Senior debt, 12% bonds
Subordinated debt
Common stock
$ 255,000
150,000
100,000
500,000
395,000
800,000
$2,200,000
Comparative Balance Sheets

at June 30, 2004 (000)
Preconfirmation
Balance Sheet
Assets
Cash
Accounts receivable
Inventory
Land
Building
Equipment
Patent
Reorganization excess
$ 300
335
350
30
200
425
290
125
$2,055
Adjustments
Debits
Credits
a 25
b 100
c 75
d 30
c 125
f 250
Reorganized
Balance Sheet
$ 300
335
375
30
300
350
260
250
$2,200

at June 30, 2004 (000)
Adjustments
Debits
Credits
Preconfirmation
Balance Sheet
Equities (claims)
Short-term bank loan
Accounts payable
Wages payable
Prepetition claims
Accounts payable, old
Taxes payable
Interest
Bank note
15% bonds payable
75
125
55
600
150
90
260
1,200
Reorganized
Balance Sheet
$ 75
125
55
h
600
i
90
j
260
g 1,200
150

at June 30, 2004 (000)
Preconfirmation
Balance Sheet
Stockholders Equity
Capital stock, old
Deficit
500
(1,000)
Adjustments
Debits
Credits
k 500
c 75
d 30
e 125
a 25
b 100
f 250
g 100
h 185
i 90
j 80
k 400
Reorganized
Balance Sheet

at June 30, 2004 (000)
Preconfirmation
Balance Sheet
New Equities
Current portion, bonds
12% senior debt
Subordinated debt
Common stock, new
Retained earnings, new
$2,055
Adjustments
Debits
Credits
g 100
g 500
h 275
j 120
g 500
h 140
j 60
k 100
Reorganized
Balance Sheet
100
500
395
800
$2,200
End of Chapter 17

CH 17

Загружено:

Сведения о документе

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

CH 17

Загружено:

Авторское право:

Доступные форматы

Corporate Liquidations

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Bankruptcy Reform Act of 1978

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 10

Duties of the Trustee

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 11

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 12

The Bankruptcy Act

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 13

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 14

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 15

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 16

Trustee or Debtor in Possession

A private trustee may be appointed.

The debtor corporation may continue in possession.

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 17

The Duties of a Trustee

Creditors committees are responsible

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 19

Operating Under Chapter 11

Protection of the debtor

Losing the confidence

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 20

The Plan of Reorganization Must:

Financial Reporting During

Effects of Chapter 11 on the

Unsecured liabilities and undersecured

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 23

Effects of Chapter 11 on the

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 24

Effects of Chapter 11 on the

Cash flow items relating to reorganization

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 25

SOP 90-7 requires that condensed combined

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 26

Financial Reporting for

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 28

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 29

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 30

Fresh-Start Reporting Results

Reporting by Entities That Do Not

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 33

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 34

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 35

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 36

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 37

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 38

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 39

Income and Retained Earnings

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 40

Tiger Balance Sheet

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 41

Tiger Balance Sheet

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 42

The Reorganization Plan

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 43

The Reorganization Plan

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 17 - 46