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1、Chapter 17 CORPORATE LIQUIDATIONS and REORGANIZATIONS Answers to Questions 1 Equity insolvency occurs when a debtor is unable to pay its debts as they come due.Bankruptcy insolvency occurs when a debtors liabilities exceed the fair value of all asset s.2 A bankruptcy proceeding is designated volunta
2、ry if the debtor corporation files the petition to place itself under the protection of the bankruptcy court and involuntary if creditors file the petition to bring the debtor into bankruptcy court.An involuntary petition may be filed by a single creditor with an unsecured claim of$12,300 or more if
3、 there are fewer than twelve unsecured creditors.Otherwise,three or more entities with unsecured claims totaling at least$12,300 must file in order to commence an involuntary case.The requirements are the same for Chapter 7 and Chapter 11 cases.3 The duties of the U.S.trustee are to maintain and sup
4、ervise a panel of private trustees eligible to serve in Chapter 7 cases,to serve as trustee or interim trustee in some bankruptcy cases,to supervise the administration of bankruptcy cases,and to preside over creditor meetings.Bankruptcy judges still supervise cases in districts without U.S.trustees.
5、4 The debtor corporation in a bankruptcy case has the following duties:(1)to file a list of creditors,a schedule of assets and liabilities,and a statement of the debtors financial affairs;(2)to cooperate with the trustee so that the trustee may perform his duties;(3)To surrender all property,includi
6、ng books,documents,records,and so on,to the trustee;and(4)to appear at hearings of the bankruptcy court as required.5 A trustee is not appointed in all Title 11 cases.In Chapter 7 cases a trustee will be elected by unsecured creditors if a majority vote in amount of holders with at least 20 percent
7、of the claims is obtained.Otherwise,an appointed interim trustee serves as trustee.In Chapter 11 cases a trustee is appointed only if deemed necessary by the court,but otherwise,the debtor remains in possession of the estate and performs the duties of a trustee.Within 30 days from the time the court
8、 orders the appointment of a trustee in a Chapter 11 case,a party in interest may request the election of a trustee.17-2 Corporate Liquidations and Reorganizations 6 The trustee in a liquidation case takes possession of the debtors estate,converts estate assets into cash,and distributes the proceeds
9、 as directed by the court.He also performs other duties such as investigating the financial affairs of the debtor,providing information about the estate to parties of interest,examining creditor claims and objecting to those that appear improper,operating the debtors business if authorized to do so
10、by the court,providing financial reports and summaries about the estate to the court,and filing reports on trusteeship as directed by the court.7 The priority rankings in a Chapter 7 liquidation case are summarized in Exhibit 172 of the text.The priorities recognized for unsecured claims(Rank II)are
11、:(1)administrative expenses,(2)claims incurred between an involuntary filing and appointment of a trustee,(3)salary claims up to$10,000 per individual earned within 90 days of filing,(4)employee benefit plan contribution claims up to$10,000 per individual earned within 180 days of filing,(5)individu
12、al claims up to$1,800 for goods and services purchased from,but not provided by the debtor,and(6)claims of governmental units for taxes owed by the debtor(subject to time restrictions),including taxes collected and withheld for which the debtor is liable.8 Four ranks within the unsecured nonpriority
13、 claim category(general unsecured claims)are:(1)claims allowed that were timely filed,(2)claims allowed where proof was filed late,(3)claims allowed for fines,penalties or forfeitures,or damages,and arising before the court order for relief or appointment of a trustee,and(4)claims for interest on un
14、secured claims.9 The accountants statement of affairs is a financial statement that is designed to provide information about liquidation values and priority rankings for use by the trustee,the court,creditors,and other interested parties in the debtors estate.Assets are measured at expected net real
15、izable values in the statement,but book values are also included for reference purposes.(The Bankruptcy Act refers to a statement of affairs,but that statement is a questionnaire that includes various financial and nonfinancial and legal section 10 A debtor corporations estate may be liquidated even
16、 though the filing is under Chapter 11.This can occur when the case is transferred to Chapter 7 for liquidation.It can also be carried out in accordance with an approved Chapter 11 plan of reorganization that calls for sale and distribution of the proceeds from the debtor corporations estate.11 A de
17、btor in possession reorganization case is a Chapter 11 case in which the bankruptcy court does not appoint a trustee,but instead,allows the debtor corporation to carry out the duties that otherwise would be performed by a trustee.12 A creditor committee can file a plan of reorganization under a Chap
18、ter 11 case after 120 days from the date the court order for relief is granted.The order for relief occurs when the debtor or creditors filing petition is approved by the court.13 The approval of a plan of reorganization requires acceptance of the plan by at least two-thirds in amount and over half
19、in number of claims in each class of claims.Further,each class of claims must accept the plan or not be impaired under it.A class of claims that would receive nothing if the corporation were liquidated is not impaired if it receives nothing under a plan and,accordingly,acceptance by that class of cl
20、aims is not required.Chapter 17 17-3 14 Prepetition liabilities are the liabilities of an enterprise that were incurred prior to a Chapter 11 filing.They are reported at the amounts allowed by the bankruptcy court.Prepetition liabilities subject to compromise are those liabilities that may be impair
21、ed by a plan and that are eligible for compromise because they are either unsecured or undersecured.15 Reorganization value is an estimate of the value of the reconstituted entity that will emerge from reorganization,plus the expected net realizable value of the assets that will be disposed of befor
22、e reconstitution occurs.It is also described as the fair value of the entity before considering liabilities.Reorganization value approximates the amount a willing buyer would pay for the assets of the entity immediately after the restructuring.16 Fresh start reporting should be used by a company eme
23、rging from Chapter 11 if the following two conditions are met:(1)the reorganization value of the assets of the emerging entity immediately before the date of confirmation is less than the total of all postpetition liabilities and allowed claims and(2)holders of existing voting shares immediately bef
24、ore confirmation receive less than 50 percent of the voting shares of the emerging entity.17 Entities not qualifying for fresh start reporting report liabilities compromised by a confirmed reorganization plan in a manner similar to that of a note issued in a noncash transaction under APB Opinion No.
25、21.Forgiveness of debt should be reported as an extraordinary item.17-4 Corporate Liquidations and Reorganizations SOLUTIONS TO EXERCISES Solution E17-1 Solution 17-2 1 b 1 a 2 d 2 d 3 c 3 c 4 d 4 d 5 d 6 c 7 a 8 d 9 c 10 d 11 c 12 d 13 c Solution E17-3 Note receivable from Patriots Supply$100,000 A
26、mount secured by inventory items at expected recoverable value (30,000)Unsecured portion of note receivable from Patriots Supply 70,000 Expected recovery on the dollar for unsecured claims .35 Expected recovery on unsecured portion of note 24,500 Add:Secured portion 30,000 Total expected recovery on
27、 note from Patriots Supply$54,500 Solution E17-4 1 On the basis of the reorganization value,Baxter Hardware qualifies for fresh start reporting because the estimated reorganization value of$2,000,000 is less than the postpetition liabilities and allowed claims.Estimated reorganization value$2,000,00
28、0 Liabilities:Postpetition liabilities$1,200,000 Prepetition liabilities 1,500,000 Fully secured debt 900,000 3,600,000 Excess liabilities over reorganization value$1,600,000 2 Old stockholders must retain less than a 50%interest in the“new entity.”Reorganization value$2,000,000 Less:Payment to prep
29、etition claimants 150,000 1,850,000 Reorganized capital structure:Postpetition liabilities$1,200,000 Notes payable 300,000 Fully secured debt 900,000 New common stock to prepetition claimants 375,000 2,775,000 New common stock to old stockholders$(925,000)Solution E17-5 Chapter 17 17-5 Cash availabl
30、e for distribution$100,000 Mortgage payable(secured portion)(50,000)50,000 Priority claims(administrative expenses and salaries)(10,000)Available for unsecured,nonpriority claims$40,000 Unsecured,nonpriority claims:Balance of mortgage payable$30,000 Accounts payable 50,000 Unsecured,nonpriority clai
31、ms$80,000$40,000 available cash/$80,000 claims=$.50 on the dollar Schedule of Distribution of Available Cash Mortgage payable secured portion$50,000 Unsecured,priority claims 10,000 Mortgage payable unsecured portion($30,000$.50)15,000 Accounts payable($50,000$.50)25,000 Total cash distributed$100,0
32、00 17-6 Corporate Liquidations and Reorganizations SOLUTIONS TO PROBLEMS Solution P17-1 1 Entries on trustees books:March 1,2008 Cash$4,000 Accounts receivable net 8,000 Inventories 36,000 Land 20,000 Buildings net 100,000 Intangible assets 26,000 Accounts payable$50,000 Note payable unsecured 40,00
33、0 Revenue received in advance 1,000 Wages payable 3,000 Mortgage payable 80,000 Estate equity 20,000 To record custody of Scott Corporation in liquidation.March 2008 Cash$7,200 Estate equity 800 Accounts receivable net$8,000 To record collection of receivables and recognize loss.Cash$19,400 Estate e
34、quity 16,600 Inventories$36,000 To record sale of inventories at a loss.Cash$90,000 Estate equity 30,000 Land$20,000 Buildings net 100,000 To record sale of land and buildings at a loss.Estate equity$26,000 Intangible assets$26,000 To write off intangible assets at a loss.Estate equity$8,200 Adminis
35、trative expenses payable new$8,200 To accrue trustee expenses.Chapter 17 17-7 Solution P17-1(continued)2 Scott Corporation in Trusteeship Balance Sheet at March 31,2008 Assets Cash$120,600 Liabilities And Deficit Accounts payable$50,000 Note payable unsecured 40,000 Revenue received in advance 1,000
36、 Wages payable 3,000 Mortgage payable 80,000 Administrative expenses payable new 8,200 Total liabilities 182,200 Less:Estate deficit (61,600)Total liabilities less deficit$120,600 Statement of Cash Receipts and Disbursements from March 1 to March 31,2008 Cash balance,March 1,2008$4,000 Add:Cash rece
37、ipts Collections of receivables$7,200 Sale of inventories 19,400 Sale of land and buildings 90,000 116,600 120,600 Less:Cash disbursements(none)0 Cash balance,March 31,2008$120,600 Statement of Changes in Estate Equity from March 1 to March 31,2008 Estate equity,March 1,2008$20,000 Less:Loss on unco
38、llectible receivables$800 Loss on sale of inventories 16,600 Loss on sale of land and buildings 30,000 Loss on write-off of intangibles 26,000 Administrative expenses 8,200 81,600 Estate deficit,March 31,2008$61,600 17-8 Corporate Liquidations and Reorganizations Solution P17-1(continued)3 Entries o
39、n trustees books:April 2008 Mortgage payable$80,000 Cash$80,000 To record payment of secured creditors from proceeds from sale of land and buildings.Administrative expenses payable new$8,200 Revenue received in advance 1,000 Wages payable 3,000 Cash$12,200 To record payment of priority liabilities.A
40、ccounts payable$15,800 Note payable unsecured 12,600 Cash$28,400 To record payment of$.32 per dollar to unsecured creditors(available cash of$28,400 divided by unsecured claims of$90,000).Accounts payable$34,200 Note payable unsecured 27,400 Estate equity$61,600 To write off remaining liabilities an
41、d close trustees records.Chapter 17 17-9 Solution P17-2 1 Amount expected to be available for unsecured claims:Total amount expected to be available for all claims$445,000 Less:Payments to secured and priority claims Mortgage payable$220,000 Note payable 75,000 Priority claims 80,000 375,000 Expecte
42、d to be available for unsecured nonpriority claims$70,000 2 Expected recovery per dollar of unsecured claims:Expected to be available(from 1)=$70,000 Unsecured claims($550,000-$375,000)=$175,000 Expected recovery on the dollar:$70,000/$175,000=$.40 3 Expected recovery by class of creditors:Fully sec
43、ured mortgage payable$220,000 Partially secured note payable$75,000+($25,000$.40)85,000 Priority unsecured liabilities to priority creditors 80,000 Unsecured nonpriority creditors accounts payable($150,000$.40)60,000 Total$445,000 17-10 Corporate Liquidations and Reorganizations Solution P17-3 1 Ran
44、king of claims:Fully secured:Holders of first mortgage and related interest$228,500 Unsecured priority:1.Administrative expenses$12,500 3.Wages payable up to$4,000 per employee 47,000 5.Customer claims for merchandise paid for and not delivered(maximum$1,800 per individual)1,500 6.State government f
45、or gross receipts taxes$3,000 Local government for property taxes 4,000 7,000 Total unsecured priority claims 68,000 Unsecured nonpriority:1.Merchandise creditors$99,000 Local bank for principal of loan 30,000 President for salary due over$4,000 1,000 130,000 4.Interest on unsecured bank loan 4,500
46、Total unsecured nonpriority claims 134,500$431,000 Total all claims 2 Distribution of available cash:1st Mortgage holders(100%)$228,500 2nd Administrative expenses(100%)12,500 3rd Employees(up to$4,000 each)(100%)47,000 4th Customers for merchandise not delivered (100%)1,500 5th State government(100
47、%)$3,000 Local government(100%)4,000 7,000 Remaining cash($374,500-$296,500)of$78,000/$130,000 claim of next rank=$.60 return on dollar 6th Merchandise creditors($99,000 .60)$59,400 Local bank for loan principal ($30,000 .60)18,000 Company president($1,000 .60)600 78,000 Total distributed(equal to a
48、vailable cash)$374,500 Chapter 17 17-11 Solution P17-4 1 Hanna Corporation Statement of Affairs on June 30,2008 Assets Realizable Values-Liability Offsets Realizable Value Available for Book for Secured Unsecured Value Creditors Creditors Pledged for partially secured creditors$55,000 Equipment net$
49、28,000 Less:Mortgage note payable and accrued interest(31,000)$0 Available for priority and unsecured creditors 2,200 Cash 2,200 15,000 Accounts receivable net 13,500 20,000 Inventories 22,500 Total available for priority and unsecured creditors 38,200 Less:Priority liabilities 12,000 Total availabl
50、e for unsecured creditors 26,200 Estimated deficiency 10,800$92,200$37,000 Liabilities And Stockholders Equity Book Secured and Unsecured Non-Value Priority Claims priority Claims Priority liabilities$12,000 Wages payable(assumed under$4,000 per employee)$12,000 Partially secured creditors 31,000 No