Chapter 20 - Corporations in Finanacial Difficulty

1 CHAPTER 20 CORPORATIONS IN FINANCIAL DIFFICULTY ANSWERS TO QUESTIONS Q20-1 The nonjudicial actions available to a financially distressed company are debt restructuring arrangements and creditor's committee management. The judicial actions available are corporate liquidation (Chapter 7) and corporate reorgani ation (Chapter 11). Q20-2 The major difference bet!een a Chapter 7 action and a Chapter 11 action is that the debtor continues as a business after a Chapter 11 reorgani ation !hereas the business does not survive a Chapter 7 liquidation. Q20-3 "nder t!o circumstances an involuntary petition for relief may be filed. The first circumstance is that the debtor is generally not paying debts as they become due. The second circumstance is that !ithin the last 1#$ days a custodian has been appointed by other creditors% by the debtor% or by some other agency to ta&e possession of the debtor's assets. 'f more than 1# creditors e(ist% then three or more creditors must combine to file the petition. These three or more creditors must have aggregate unsecured claims of at least )*%$$$. Q20-4 The follo!ing items are usually included in the +lan of ,eorgani ation filed as part of a Chapter 11 reorgani ation.ll major actions to be ta&en during the reorgani ation(1) /iscontinuances of unprofitable operations (#) ,estructuring of debt !ith specific creditors (0) ,evaluation of assets and liabilities (1) Changes in the par value of outstanding stoc&% or realignment of stoc&holders' equity !ith ne!ly issued shares of voting common stoc&. Q20-5 The account ,eorgani ation 2alue in 3(cess of the .mount .ssigned to 'dentifiable .ssets is established during a Chapter 11 fresh start accounting to record the e(cess of the reorgani ation value that is not assigned to specific assets. The account is an intangible asset and is accounted for in accordance !ith FASB 142. Q20-6 . company in Chapter 11 reorgani ation qualifies for fresh start accounting if both of the follo!ing occur1. The reorgani ation value of the entity's assets of the emerging entity immediately before the date of confirmation is less than the total of all post4petition liabilities and allo!ed claims5 and #. 6olders of e(isting voting shares immediately before confirmation receive less than *$7 of the voting shares of the emerging entity. Companies using fresh start accounting revalue their assets to fair values% using the procedures in FASB 141. .n account called ,eorgani ation 2alue in 3(cess of the .mount .ssigned to 'dentifiable .ssets is used to record any e(cess in reorgani ation value not assigned to specific assets.

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Chapter 20 - Corporations in Finanacial Difficulty

Q20-7 The financial statements that must be filed by a company during a Chapter 11 reorgani ation include a complete set of audited financial statements. SOP 90-7 established specific guidelines for these statements% noting that amounts associated !ith reorgani ation should be reported separately. Q20- The rights of creditors !ith priority in a Chapter 7 liquidation are to receive any assets available to unsecured creditors after the secured creditors have been satisfied. Q20-9 The statement of affairs is the basic accounting report made at the beginning of the liquidation process to present the e(pected reali able amounts from disposal of the assets% the order of creditors' claims% and the e(pected amount unsecured creditors !ill receive as a result of the liquidation. 'n addition% the statement of affairs presents the boo& values of the debtor company's balance sheet accounts and the estimated deficiency to the general unsecured creditors. .s a final point% the statement of affairs is not a going concern report. Q20-10! . trustee !ho ta&es title to the debtor's assets in a liquidation must ma&e a periodic financial report to the ban&ruptcy court reporting on the progress of the liquidation and on the fiduciary relationship held. 8hen the trustee accepts the assets% a ne! set of boo&s is opened for the debtor and a ne! account is created to recogni e the debtor's interest in the net assets accepted by the trustee. . statement of reali ation and liquidation is prepared on a monthly basis for the ban&ruptcy court sho!ing the results of the trustee's fiduciary actions9 beginning at the point the trustee accepts the debtor's assets. Q20-11! :ales of assets are reported in the statement of reali ation and liquidation as assets reali ed in the assets section of the statement.

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Chapter 20 - Corporations in Finanacial Difficulty

SOLUTIONS TO CASES C20-1 C"#$%&'"() A*&#"+,&%-#( The options to the creditors are (1) form a creditors' committee% (#) a Chapter 11 reorgani ation% and (0) a Chapter 7 liquidation. The eventual decision must rest upon the creditors' assessment of the viability of the rehabilitation of the debtor versus the liquidation values of the debtor's assets. ;ost creditors do not !ant to see the liquidation of a debtor because% as creditors% they are in the business of loaning monies% not trying to manage a business or attempting to obtain as much of a liquidation dividend as possible in a liquidation. ;ost creditors !ill !or& !ith the debtor's management as long as possible. :ecured creditors have greater protection of their receivables than do unsecured creditors. 6o!ever% even most secured creditors prefer to see a debtor company be rehabilitated after a time of financial difficulty rather than see the debtor liquidated. The timing of the cash flo!s is some!hat dependent on the amount of reduction in debt the creditors are !illing to absorb. 'f the creditors are !illing to !or& !ith the debtor% the creditors may eventually reali e a greater percentage of their debt% but it usually ta&es a longer time to receive the payments from the debtor. The creditors' committee is a nonjudicial action that provides for fle(ibility to both the creditors and the debtor. The creditors' committee typically !or&s !ith the debtor company to enact a plan of settlement of the debtor's indebtedness. 'n some cases% the creditors may assume management control of the company% but most creditors are reluctant to do this because of the added ris& of legal action if the company does enter ban&ruptcy. Creditors may eventually receive a substantial part% or possibly all% of their receivables as the debtor is able to <!or& do!n< its debt over time. Chapter 11 reorgani ation offers the creditors a chance to continue having a customer once the customer solves its immediate financial problems. . reorgani ation is an acceptable option if the creditors feel the company !ould have the basic operating and financial foundations after the reorgani ation to become a going concern. Creditors often accept reduced amounts as settlements of their receivables% or !ill modify the terms of e(isting debt as part of the reorgani ation agreement. Chapter 7 liquidations are the final step. The creditors must go through the judicial process that may ta&e a long time to complete. =iquidation should be used only if no other alternative is viable. Creditors often receive a smaller portion of their receivables because of the forced liquidation of the assets and the e(tensive legal and administrative costs involved in a liquidation.

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Chapter 20 - Corporations in Finanacial Difficulty

C20-2 R#(#,"./ R#*,&#$ &' B,+0"12&.3 The !ebsite for the ".:. >an&ruptcy Courts is444.1(.'1"&(.5'-67,+0"12&.3.'1"&(./&8* a. The ?requently .s&ed @uestions (?.@s) for the ".:. >an&ruptcy Courts state that a ".:. ban&ruptcy judge is a district court judicial officer !ho is appointed by the majority of judges of the ".:. appeals court to have jurisdiction over ban&ruptcy matters. .s ban&ruptcy cases come before a district court% a ban&ruptcy judge is assigned to the case. :ome courts assign judges based on random assignment !hile other courts have a chief judge !ho see&s to select a judge to assign based on a judge9s e(perience or special e(pertise relevant to the case. 3ach court !ill have a !ritten plan or system for assigning cases. b. The ".:. >an&ruptcy Court9s 8ebsite has a lin& to Afficial >an&ruptcy ?orms to be used in filings before the courts. The forms and instructions for a 2oluntary +etition are available in +art ' of the >an&ruptcy ?orms ;anual page. The official form is ?A,; >1 for a voluntary petition. . voluntary petition is initiated by the debtor and therefore the information required is principally related to the debtor% such as name% address% and location of the principal assets of the debtor. The debtor must declare such items as the number of creditors% the estimated assets% the estimated debts% the type of petition (i.e.% Chapter 7% Chapter 11% etc.)% if sufficient funds !ill be available to satisfy the unsecured creditors. The debtor may also be required to file additional e(hibits (3(hibit . for publicly traded companies% 3(hibit > is used in personal filings and 3(hibit C to describe any property that might pose a threat of identifiable harm to public health or safety). c The "nited :tates >an&ruptcy Courts 8ebsite presents a lin& to >an&ruptcy :tatistics that are presented in .pdf format. :tatistics are presented for various time periods such as quarters% fiscal years and calendar years. Bote that Case #$40 as&s for the most recent calendar year ending on /ecember 01. (1) Total business filings are presented at the top of the form for business and nonbusiness filings for the t!elve month period ended for the most recent year. :tatistics for prior years are also available. >usiness filings are typically about 01%$$$ but do fluctuate slightly based on economic conditions. .ppro(imately si(ty percent of these filings are under Chapter 7% about t!enty4eight percent under Chapter 11% and the remainder under various other chapters of the >an&ruptcy Code. (#) :tudents should find the ?ederal judicial district in !hich their educational institution is located. The larger states typically have several districts and students may have to ma&e an assumption for !hich district they are located. 't is instructive to see that the numbers of filings vary !idely by district. The number of filings may differ due to different economic factors for specific parts of the "nited :tates% the nature of the industrial base in a specific district% the si e of a district% and other factors reflecting business factors across court districts. :tudents might reflect on !hy the number of filings in their ?ederal court district are different from those in other districts in other circuits.

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Chapter 20 - Corporations in Finanacial Difficulty

C20-3! S#*#.&%'+ '9 B,+0"12&.3 T"1(&## ,+$ T"1(&##:( R#(2'+(%7%*%&%#( Title 11 of the "nited :tates Code may be obtained from several sources through using a !eb bro!ser and the search term% CTitle 11 of the ".:. Code.D The case as&s about trustees for a Chapter 7 ban&ruptcy filing. a. :ubchapter 1 of Chapter 7 of Title 11 of the ".:. Code specifies the administration of a Chapter 7 ban&ruptcy filing. :ection 7$1 states that the "nited :tates Trustee shall appoint an interim trustee !ho is a member of the panel of private trustees established under federal la!. +rivate trustees are persons !ho have prior financial e(pertise and e(perience and have been approved by a formal revie! process. .fter the appointment of an interim trustee% :ection 7$# describes ho! creditors may elect a trustee under the circumstances in !hich creditors holding at least t!enty percent of the unsecured claims request that an elected trustee administer the Chapter 7 ban&ruptcy. . candidate must receive the votes of creditors holding a majority of the claims of the unsecured creditors. b. :ection 7$1 of :ubchapter 1 of Chapter 7 of Title 11 of the ".:. Code defines the duties of the trustee. The trustee is responsible for administering the business% is accountable for all property received% and must evaluate the claims of the creditors to ma&e sure the claims are valid prior to settlement. The trustee also prepares periodic reports and summaries of the operations of the business !hich it provides to the "nited :tates Trustee or >an&ruptcy Court. "pon completion of the operations% the trustee must file a final report on the administration of the estate !ith the court and !ith the "nited :tates Trustee.

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Chapter 20 - Corporations in Finanacial Difficulty

1C20-4 T/# B,+0"12&.3 '9 W'"*$C'8 Averall% the #$$# ban&ruptcy of 8orldCom resulted in a cumulative net reduction to their shareholders9 equity of )7$.E billion as of /ecember 01% #$$1% and a reduction in previously reported net income of )17.1 billion and )*0.1 billion for the years ended /ecember 01% #$$1% and #$$$ respectively. Food!ill of )11.G billion !as reduced to ero at /ecember 01% #$$1. The 8orldCom ban&ruptcy and resultant adjustments made during the reorgani ation process are certainly one of the most significant ban&ruptcies in ".:. business history. The follo!ing information is ta&en from 8orldCom 'nc.9s 1$4H for the fiscal year #$$# that !as filed !ith the :3C on ;arch 1#% #$$1. a. (:ource- 'tem 0% =egal +roceedings) 8orldCom filed a voluntary petition for ban&ruptcy on Iuly #1% #$$#% under Chapter 11% ,eorgani ation. b. (:ource- 'tem 0% =egal +roceedings and the ;/J.) The primary reason seems to be that management and the >oard of /irectors had been informed of very significant accounting irregularities and needed time to investigate the possible irregularities% and to protect the company from la!suits from creditors and others. ?or e(ample% on Iune #K% #$$#% the :3C filed a civil suit against the company for its past financial reports. An .pril #G% #$$#% >ernard 3bbers resigned as +resident and Chief 3(ecutive Afficer. The company undoubtedly felt it needed the protection of ban&ruptcy to give it time to study the breadth of its financial and accounting problems and to reorgani e to recover from those problems !ithout additional legal pressure from its creditors. c. (:ource- 'tem 0% =egal +roceedings) An Iune #*% #$$#% the company publicly announced that an internal audit found a number of transfers from line cost e(penses (referred to as access cost e(penses) to capital accounts% thus decreasing e(penses and increasing assets. ?or the year #$$1 and the first quarter of #$$#% this amount of transfer !as )0.G billion. 'n addition to this item% the company !as improperly accounting for impairment tests on its long4lived assets% its acquisitions% its revenue contracts and several other irregularities. 6o!ever% it !as the accounting for the access costs as assets !hen they !ere clearly e(penses that !ere the primary accounting irregularity that initiated the internal revie!. d. (:ource- 'tem 7% ;anagement9s /iscussion and .nalysis) 'tem 7 of the company9s #$$# 1$4H presents a section titled C,estatements and ,eclassifications of +reviously 'ssued Consolidated ?inancial :tatementsD. . table is presented that summari es the restatement items on revenue and pre4ta( income or loss for the years ended /ecember 01% #$$1 and #$$$. The major categories of income statement restatement adjustments are presented belo! (in )millions)% !ith a brief e(planation of each category follo!ing the table- (+arentheses used for decreases in reported amounts)

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Chapter 20 - Corporations in Finanacial Difficulty

C20-4 (continued)
Lear 3nded /ecember 01% #$$1 +re4ta( ,evenue income (loss) 0*%1#1 #%07* 444 444 11 444 (71G) (1%#$1) 444 *%#KE 444 (7) 0%0## (77*) 07%KKE (KKG) (11%171) (1#%*G#) (#%G00) (#%#70) #%7*$ (EGG) (*7*) (E#0) (0*) 0E0 (*$K) (17%*$0) 1%0#0 Lear 3nded /ecember 01% #$$$ +re4ta( ,evenue income (loss) 0G%$#$ 7%*E1 444 K (1G0) 444 1E (0K) 444 1%1#7 444 1 G#K (K$#) 0G%011 *# (1G%G#$) (17%1E$) (1%E#7) (0%*K7) (1%710) (1E7) (GG*) (70#) (0#*) (1#K) (7*$) (*E%$$#) 11G

'tem+reviously reported ,estatement adjustments1. 'mpairment #. 'mproper reduction of access costs 0. +urchase accounting 1. =ong lived asset adjustments *. 'nternational adjustments K. ,evenue related adjustments 7. .djustments to accrued liabilities E. 3mbratel and .vantel acquisitions G. "nclassified incomeM (e(pense) 1$. Ather Total adjustment items /iscontinued Aperations .djustment ,evenue% as restated ;inority interest adjustment +re4ta( loss% as restated

>ecause most of the accounting personnel% including the Chief ?inancial Afficer and the controller% !ere terminated shortly after the large scope of the accounting irregularities !ere discovered% the company determined that it could not objectively restate periods prior to the #$$$ fiscal year. 6o!ever% a minor adjustment decrease of ).7 billion !as made to the ending shareholders9 equity as of /ecember 01% 1GGG. . brief e(planation of each of the 1$ adjustment categories above is summari ed from the disclosures in 'tem K of 8orldCom9s #$$# 1$4H. 1. 'mpairment- The company discovered that impairment tests had not been performed for good!ill and long4lived assets even though FASB 121 triggers had occurred. The application of these impairment tests resulted in very significant !ritedo!ns for both #$$$ and #$$1. #. 'mproper reduction of access costs- The primary adjustments for this item !ere due to the improper capitali ation of access costs that should have been e(pensed as incurred in accordance !ith F..+. 0. +urchase accounting- The company made numerous acquisitions% including the ;C' acquisition% bet!een 1GG0 and #$$1 and a revie! of these acquisitions concluded that a number of errors !ere found in the application of purchase accounting valuations and procedures that overstated the amounts capitali ed for the acquisitions.

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Chapter 20 - Corporations in Finanacial Difficulty

C20-4 (continued) 1. =ong lived asset accounting- This item includes adjustments to depreciation and amorti ation% changes in the estimated useful lives of long4lived assets% including those acquired in the ;C' combination% and other costs that had been inappropriately capitali ed as long4lived assets that should have been e(pensed. *. 'nternational- .djustments !ere made for correcting the ".:. F..+4based statements from the foreign accounting principles. 'n addition% a revie! of the functional currency rules resulted in changing the functional currencies for many of the international subsidiaries from the local currency to the ".:. dollar. K. ,evenue related adjustments- . number of adjustments !ere made because of lac& of documentation to support the company9s deferral of income under :.> 1$1. 'n addition% the company had incorrectly accounted for some contracts as sales !hen in fact the company had acted as an agent and should have recorded just the net of the amounts as income rather than record gross sales and gross costs. 7. .djustments to accrued liabilities- .djustments !ere made to eliminate improper accruals of liabilities for items such as legal reserves% employee benefits and ta( liabilities. E. 3mbratel and .vantel acquisitions- . revie! of the 3mbratel acquisition sho!ed an incorrect interpretation !ith regard to not having control over 3mbratel and that 3mbratel should have been consolidated rather than reported net as an investment. . revie! of the .vantel relationship to 8orldCom resulted in changing the accounting from an equity investment to a full consolidation. G. "nclassified incomeM (e(pense)- . revie! of several accrued liability accounts sho!ed that there !as inadequate documentation to support the accruals. .lso% there !ere other accrued assets and some liabilities recorded on the historical balance sheet for !hich there !as either no% or inadequate% documentation to support that the company o!ned the assets or o!ed the liabilities. 1$. Ather- The company made a number of reclassifications% revaluations of derivatives% intercompany balances% and certain capitali ed costs such as interest% labor and overhead for capital projects. These adjustments !ere also carried through the restated balance sheet and statement of cash flo!s for #$$1 and #$$$. e. (:ource- 'tem 7 of 8orldCom9s #$$# 1$4H) ?rom the date the ban&ruptcy petition !as filed% Iuly #1% #$$#% through the entire reorgani ation period% the company used the provisions of :A+ G$47 for accounting and financial reporting purposes. The C/ebtors4'n4+ossessionD heading informs readers of the financial statements that the company is in ban&ruptcy reorgani ation but management still controls the company under the administration of a ban&ruptcy trustee. The balance sheet reports pre4 petition liabilities separately from others and liabilities not subject to compromise are reported separately in both the current and noncurrent sections of the balance sheet. The income statement separately reports the reorgani ation gain or loss reali ed during the reorgani ation period. f. (:ource- 'tem 7 of 8orldCom9s #$$# 1$4H) To!ards the beginning of 'tem 7% the 1$4 H reports that the company !ill adopt fresh4start accounting under the provisions of :A+ G$47 as of the fresh4start reporting date. The company !ill revalue its assets and liabilities% allocate the reorgani ation value to the assets and liabilities% eliminate the accumulated deficit in shareholders9 equity% and the company9s ne! debt and equity !ill be recorded.

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Chapter 20 - Corporations in Finanacial Difficulty

SOLUTIONS TO E;ERCISES E20-1 1. #. 0. 1. *. c d c d c <1*&%2*#-C/'%.# Q1#(&%'+( '+ C/,2&#" 11 R#'"5,+%=,&%'+( >AICPA A$,2&#$?

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Chapter 20 - Corporations in Finanacial Difficulty

E20-2 R#.'-#"3 A+,*3(%( 9'" , C/,2&#" 11 R#'"5,+%=,&%'+ a. ,ecovery analysis for plan of reorgani ationTaylor Companies% 'nc. +lan of ,eorgani ation ,ecovery .nalysis /ecember 01% #$N1 ,ecovery 3limination of /ebt and 3quity +ost4petition liabilities ClaimsM'nterest.ccounts +ayable Botes +ayable% 1$7 ,elated 'nterest +ayable >onds +ayable% 1#7 ,elated 'nterest +ayable Total Common shareholdersCommon :toc& .dditional +aid4'n ,etained 3arnings /eficit Total (0$%$$$) (E$%$$$) (1*$%$$$) (1K%$$$) (#$$%$$$) (#1%$$$) (17$%$$$) (1$$%$$$) (#$$%$$$) 17E%$$$ (K##%$$$) E%$$$ #*%$$$ 1K%$$$ 1E%$$$ K7%$$$ (1$$%$$$) 171%$$$ (17E%$$$) (1$%$$$) (#0$%$$$) (#$0%$$$) 1$$7 (#$$%$$$) (#G%$$$) (##G%$$$) (#$$%$$$) (#G%$$$) (KK#%$$$) (#$$%$$$) ,eduction of Taylor's Common .ssets 7 )# par :toc& 2alue

:urviving /ebt (0$%$$$)

Total ) (0$%$$$)

,ecovery 7 1$$7 G$ E0 $ 1$$ #*

(7#%$$$) (1#*%$$$)

(7#%$$$) (1#*%$$$) 4$4 (#$$%$$$) (K%$$$)

(K%$$$)

1$$7

Note: +arentheses indicate credit amount.

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Chapter 20 - Corporations in Finanacial Difficulty

E20-2 (continued) b. Iournal entries to record reorgani ation(1) .ccounts +ayable Botes +ayable% 1$7 'nterest +ayable Cash .ccounts ,eceivable (net) =and Fain on /isposal of =and Fain on /ischarge of /ebt ,ecord discharge of debt. Common :toc& ()1 par) .dditional +aid4'n Capital Fain on /isposal of =and Fain on /ischarge of /ebt Common :toc& ()# par) ,etained 3arnings ,ecord change in par value of stoc& and elimination of deficit. E$%$$$ 1*$%$$$ 1$%$$$

K%$$$ 7#%$$$ E*%$$$ 1$%$$$ K7%$$$

(#)

1$$%$$$ 171%$$$ 1$%$$$ K7%$$$

#$$%$$$ 17E%$$$

E20-3 <1*&%2*#-C/'%.# Q1#(&%'+( '+ C/,2&#" 7 L%@1%$,&%'+( 1. #. 0. 1. *. c a d a c

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Chapter 20 - Corporations in Finanacial Difficulty

E20-4 C/,2&#" 7 L%@1%$,&%'+ a. :chedule to calculate amount available for general unsecured creditorsTotal estimated fair values Claims of secured creditorsBotes payable and interest (,eceivables and 'nventory) >onds payable and interest (=and and >uilding) Claims of creditors !ith priority8ages payable Ta(es payable .vailable to general unsecured creditors )171%$$$ )11*%$$$ #01%$$$ ) G%*$$ 11%$$$ (01K%$$$) )1#*%$$$ (#0%*$$) )1$1%*$$

b.

.ccounts payable Botes payable and interest =ess- :ecured by receivables and inventory Total unsecured claims )1$1%*$$ O *E7 )17*%$$$

)1G*%$$$ (11*%$$$)

) G*%$$$ E$%$$$ )17*%$$$

3stimated dividend-

c.

Froup .ccounts +ayable 8ages +ayable Ta(es +ayable Botes +ayable and 'nterest >onds +ayable and 'nterest

Credit ) G*%$$$ G%*$$ 11%$$$ E$%$$$ 11*%$$$ #01%$$$

+ercentage *E7 1$$ 1$$ *E 1$$ 1$$

/istributed ) **%1$$ G%*$$ 11%$$$ 1K%1$$ 11*%$$$ #01%$$$ )171%$$$

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Chapter 20 - Corporations in Finanacial Difficulty

E20-5! S&,&#8#+& '9 R#,*%=,&%'+ ,+$ L%@1%$,&%'+ +ace Corporation :tatement of ,eali ation and =iquidation .ssets .ssets to be ,eali ed Ald ,eceivables% net ;ar&etable :ecurities Ald 'nventory /epreciable .ssets% net .ssets .cquired Be! ,eceivables 7*%$$$ ) 0E%$$$ 1#%$$$ K$%$$$ GK%$$$ .ssets ,eali ed Ald ,eceivables Be! ,eceivables ;ar&etable :ecurities :ales of 'nventory .ssets Bot ,eali ed Ald ,eceivables% net Be! ,eceivables% net /epreciable .ssets 17%$$$ #E%$$$ E$%$$$ ) #1%$$$ 17%$$$ 1$%*$$ 7*%$$$

:upplementary 'tems :upplementary Charges Trustee's ?ee ) 1%0$$ :upplementary Credits Bet =oss ) K%E$$

=iabilities =iabilities =iquidated Ald Current +ayables =iabilities Bot =iquidated Ald Current +ayables #K%$$$ )000%0$$ ) ##%$$$ =iabilities to be =iquidated Ald Current +ayables =iabilities 'ncurred )000%0$$ ) 1E%$$$

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Chapter 20 - Corporations in Finanacial Difficulty

SOLUTIONS TO PROBLE<S P20-6 C/,2&#" 11 R#'"5,+%=,&%'+ a. ,ecovery analysis for plan of reorgani ation+olydorous Corporation +lan of ,eorgani ation ,ecovery .nalysis ,ecovery +re4 Confir4 mation +ost4petition liabilities ClaimsM'nterest.ccounts +ayable 'nterest +ayable Botes +ayable% 1$7 Total +referred :hareholders Common :hareholders ,etained 3arnings /eficit Total (1$%$$$) (1K$%$$$) (#$%$$$) (01$%$$$) (*#$%$$$) (1$$%$$$) (1*$%$$$) E$%$$$ (7$$%$$$) #$%$$$ 1$%$$$ K$%$$$ G$%$$$ *$%$$$ 10$%$$$ (E$%$$$) 1G$%$$$ (1$%$$$) (K$%$$$) (01$%$$$) 1$$7 (1$$%$$$) *1$%$$$ *$ #$ (*$%$$$) (#$%$$$) (*$%$$$) (#$%$$$) 3limination of /ebt and 3quity :urviving /ebt (1$%$$$) (1$%$$$) (1$%$$$) (1$%$$$) (#1$%$$$) 0$ (0$%$$$) (1$$%$$$) Cash 1#7 :ecured Botes Common 7 :toc& 2alue Total ) (1$%$$$) (11$%$$$) (1$%$$$) (#E$%$$$) ,ecovery 7 1$$7 EE *$ E#

+re4confirmation total equities of )7$$%$$$ includes )KG$%$$$ pre4petition and )1$%$$$ post4petition increase. Note: +arentheses indicate credit amount.

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Chapter 20 - Corporations in Finanacial Difficulty

P20-6 (continued) b. .nalysis for evaluating qualifications for fresh start accounting?irst condition+ost4petition liabilities =iabilities deferred pursuant to Chapter 11 proceedings Total post4petition liabilities and allo!ed claims ,eorgani ation value 3(cess of liabilities over reorgani ation value :econd condition6olders of e(isting voting shares immediately before confirmation receive #$7 of voting shares of emerging entity. Therefore% both conditions for a fresh start occur% and fresh start accounting is used to account for the company. ) 1$%$$$ *#$%$$$ )*0$%$$$ (*1$%$$$) ) #$%$$$

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Chapter 20 - Corporations in Finanacial Difficulty

P20-6 (continued) c. 3ntries for e(ecution of plan of reorgani ation(1) =iabilities :ubject to Compromise Cash Botes +ayable% 1#7% secured Common :toc& (ne!) Fain on /ebt /ischarge ,ecord debt discharge. +referred :toc& Common :toc& (old) Common :toc& (ne!) .dditional +aid4'n Capital ,ecord e(change of stoc& for stoc&. ,eorgani ation 2alue in 3(cess of .mounts .llocable to 'dentifiable .ssets Fain on /ebt /ischarge .dditional +aid4'n Capital .ccounts ,eceivable (net) 'nventory +roperty% +lant% and 3quipment ,etained 3arnings 4 /eficit ,ecord fresh start accounting and eliminate deficit. *#$%$$$ K$%$$$ 01$%$$$ 0$%$$$ G$%$$$

(#)

1$$%$$$ 1*$%$$$

7$%$$$ 1E$%$$$

(0)

0$%$$$ G$%$$$ 1E$%$$$

0$%$$$ 7%$$$ 1E0%$$$ E$%$$$

:chedule to support allocation of reorgani ation value>oo& 2alue Cash .ccounts ,eceivable (net) 'nventory +roperty% +lant% and 3quipment (net) ,eorgani ation 2alue in 3(cess of .mounts .llocable to 'dentifiable .ssets Total Bote) 0$%$$$ 11$%$$$ #*%$$$ 11*%$$$ 4$4 )K1$%$$$ ?air 2alue ) 0$%$$$ 11$%$$$ 1E%$$$ #K#%$$$ 0$%$$$ )1*$%$$$ /ifference ) 4$4 (0$%$$$) (7%$$$)

(1E0%$$$) 0$%$$$ )(1G$%$$$)

The post4reorgani ation total fair value is the reorgani ation value of )*1$%$$$ less the )K$%$$$ paid to fulfill the plan of reorgani ation.

20-16

Chapter 20 - Corporations in Finanacial Difficulty

P20-6 (continued) d. ?resh start balance sheet !or&paper for company emerging from reorgani ation- (8or&sheet not required) .djustments to ,ecord Confirmation of +lan /ebt 3(change ?resh /ischarge of :toc& :tart (K$%$$$) (K$%$$$) 4$4 Company's ,eorgani ed >alance :heet 0$%$$$ 11$%$$$ 1E%$$$ 1*E%$$$ #K#%$$$

+re4 confir4 mation .ssetsCash .ccounts ,eceivable (net) 'nventory +roperty% +lant% and 3quipment (net) ,eorgani ation 2alue 'n 3(cess of .mounts .llocable to 'dentifiable .ssets Total .ssets =iabilities=iabilities Bot :ubject to CompromiseCurrent =iabilities =iabilities :ubject to Compromise Botes +ayable% 1#7% secured Total =iabilities :hareholders' 3quity+referred :toc& Common :toc& (old) Common :toc& (ne!) .dditional +aid4'n Capital ,etained 3arnings Total :hareholders' 3quity Total =iabilities and :hareholders9 3quity G$%$$$ 11$%$$$ #*%$$$ #**%$$$ 11*%$$$

(0$%$$$) (7%$$$) (07%$$$) (1E0%$$$)

7$$%$$$

(K$%$$$)

4$4

0$%$$$ (1G$%$$$)

0$%$$$ 1*$%$$$

(1$%$$$) (*#$%$$$) (*0$%$$$ ) (1$$%$$$) (1*$%$$$) E$%$$$ (17$%$$$ ) (7$$%$$$ ) *#$%$$$ (01$%$$$) 1E$%$$$

(1$%$$$) (01$%$$$) (0*$%$$$)

4$4

4$4

(0$%$$$) (G$%$$$) (1#$%$$$) K$%$$$

1$$%$$$ 1*$%$$$ (7$%$$$) (1E$%$$$) 4$4 4$4

1E$%$$$ G$%$$$ (E$%$$$) 1G$%$$$ 1G$%$$$

(1$$%$$$) 4$4 (1$$%$$$) (1*$%$$$)

Note: +arentheses indicate credit amount.

20-17

Chapter 20 - Corporations in Finanacial Difficulty

P20-6 (continued) d. >alance sheet for company emerging from Chapter 11 reorgani ation !ith fresh start accounting-

+olydorous Company >alance :heet 3merging /ate .ssetsCash .ccounts ,eceivable (net) 'nventory Total Current .ssets +roperty% +lant% and 3quipment (net) ,eorgani ation 2alue 'n 3(cess of .mounts .llocable to 'dentifiable .ssets Total .ssets =iabilities.ccounts +ayable Botes +ayable% 1#7% secured Total =iabilities :hareholders' 3quityCommon :toc& Total :hareholders' 3quity Total =iabilities and :hareholders' 3quity ) 0$%$$$ 11$%$$$ 1E%$$$ )1*E%$$$ #K#%$$$ 0$%$$$ )1*$%$$$ ) 1$%$$$ 01$%$$$ )0*$%$$$ 1$$%$$$ )1$$%$$$ )1*$%$$$

20-18

Chapter 20 - Corporations in Finanacial Difficulty

P20-7 C/,2&#" 7 L%@1%$,&%'+A S&,&#8#+& '9 A99,%"( a. Bame >rand Company :tatement of .ffairs Iuly 01% #$N1 .ssets 3stimated .mount .vailable to "nsecured Claims

>oo& 2alue (1) ) *$%$$$ .ssets pledged !ith fully secured creditors.ccounts receivable (net) =ess- 1#7 note payable and interest =and +lant and equipment (net) =ess- ;ortgages payable and interest (#) 0$%$$$ .ssets pledged !ith partially secured creditors;ar&etable securities =ess- 1$7 note payable and interest 'nventory =ess- .ccounts payable (0) ?ree assetsCash .ccounts receivable (net) 'nventory +repaid insurance +lant and equipment (net) ?ranchises

3stimated Current 2alues

3stimated Fain (=oss) on ,eali ation

) *$%$$$ (11%$$$) )11$%$$$ 1*$%$$$ )#K$%$$$ (#01%K$$) #*%1$$ ) K%$$$ ) 0$%$$$ (1#%$$$)

E$%$$$ 1K#%$$$

) ##%$$$ (#G%1$$) ) 7*%$$$ (1$*%$$$) ) *%$$$ **%$$$ 7K%$$$ 1%*$$ 1G$%$$$ 0$%$$$ *%$$$ **%$$$ 7K%$$$ 1%*$$ 1G$%$$$ 0$%$$$ )0EE%G$$ (1*%$$$) )010%G$$ E#%*$$ )1#K%1$$

(E%$$$)

7G%$$$

(1%$$$)

*%$$$ **%$$$ E1%$$$ 7%$$$ #*$%$$$ 7#%$$$

(*%$$$) (*%*$$) (K$%$$$) (1#%$$$)

)E71%$$$

3stimated amount available =ess- Creditors !ith priority Bet available to unsecured creditors 3stimated deficiency Total unsecured debt

)(1$K%*$$)

20-19

Chapter 20 - Corporations in Finanacial Difficulty

P20-7 (continued) 3quities >oo& 2alue ) 11%$$$ #01%K$$ (1) ?ully secured creditors1#7 note payable and interest ;ortgages payable and interest ) 11%$$$ #01%K$$ )#7E%K$$ 3stimated .mount "nsecured

#G%1$$ 1$*%$$$

(#)

+artially secured creditors1$7 note payable and interest =ess- ;ar&etable securities .ccounts payable =ess- 'nventory

) #G%1$$ (##%$$$) )1$*%$$$ (7*%$$$) ) 10%$$$ #$%$$$ 1#%$$$ ) 1*%$$$

7%1$$ 0$%$$$

4$4 #$%$$$ 1#%$$$

(0)

Creditors !ith priority3stimated liquidation e(penses 8ages payable Ta(es payable

1K$%$$$ #1#%$$$ 17%$$$ #1$%$$$ (#$0%$$$) )E71%$$$

(1)

"nsecured creditors.ccounts payable Botes payable 'nterest payable :toc&holders' equityCommon stoc& ,etained earnings (deficit)

1K$%$$$ #1#%$$$ 17%$$$

(*)

)1#K%1$$

b.

+ercentage to unsecured creditors-

)010%G$$ O E$.K*7 )1#K%1$$

20-20

Chapter 20 - Corporations in Finanacial Difficulty

P20a.

C/,2&#" 7 L%@1%$,&%'+A S&,&#8#+& '9 A99,%"( >AICPA A$,2&#$? To!er% 'nc. :tatement of .ffairs /ecember 01% #$N1 .ssets 3stimated .mount .vailable to "nsecured Claims 3stimated Fain (=oss) on ,eali ation

>oo& 2alue ) 1$%$$$ 10%$$$ G$%$$$ 11$%$$$

(1)

.ssets pledged !ith fully secured creditors.ccounts receivable =and >uilding (net) ;achinery (net) =ess- ?ully secured claims from liability sideBote payable4ban& ) 0$%$$$ ;ortgage payable and related interest 10#%1$$

3stimated Current 2alues ) 1$%$$$ #*%$$$ 11$%$$$ 7*%$$$ )#*$%$$$

) 1#%$$$ #$%$$$ (K*%$$$)

(1K#%1$$)

) E7%K$$

(#) #$%#$$

.ssets pledged !ith partially secured creditors;ar&etable securities .ccrued interest =ess- Botes payable (to ban&)

) 1G%$$$ #$$ ) 1G%#$$ (#$%$$$) ) 1%*$$ 0*%$$$ *$%$$$ K$%$$$ 4$4 1%*$$ 0*%$$$ *$%$$$ K$%$$$

(1%$$$)

1%*$$ 0*%$$$ K$%$$$ 1$%$$$ *%$$$

(0)

?ree assetsCash .ccounts receivable (after reclassifying )*%$$$ of credit balances to accounts payable) ?inished goods ,a! materials (net of )1$%$$$ of conversion costs) +repaid e(penses

(1$%$$$) #$%$$$ (*%$$$)

)111%7$$

3stimated amount available for unsecured creditors% including creditors !ith priority =ess- =iabilities !ith priority 3stimated amount available for unsecured creditors 3stimated deficiency to unsecured creditors (plug) Total unsecured debt

)#01%1$$ (11%*$$) )1G#%K$$ 1E%#$$ )#1$%E$$ )(#G%$$$)

20-21

Chapter 20 - Corporations in Finanacial Difficulty

P20-

(continued) =iabilities and :toc&holders' 3quity (1) ?ully secured creditorsBotes payable4 ban& ;ortgage payable and interest Total (deducted on asset side) +artially secured creditorsBotes payable4ban& =ess- +ledged mar&etable securities and interest (from asset side) =iabilities !ith priority3stimated liquidation e(penses 8ages payable +ayroll ta(es payable Total (deducted on asset side) "nsecured creditors.ccounts payable (after e(cluding )1*%$$$ of payroll ta(es payable and including )*%$$$ of credit balances reclassified from accounts receivable) Botes payable .udit fee of prior year Contingent liability on damage suit :toc&holders' equity% after giving effect to unrecorded items that are properly boo&able as of /ecember 01% #$N1P ()1$$%$$$ 4 )#$%$$$ 4 )*$$ Q )#$$ 4 )*$$ 4 )#%1$$ 4 )*%$$$ 4 )*$%$$$) ) 0$%$$$ 10#%1$$ )1K#%1$$ ) #$%$$$ (1G%#$$) ) 11%$$$ 1*%$$$ 1*%*$$ ) 11%*$$ ) E$$ .mount "nsecured

>oo& 2alue ) 0$%$$$ 10#%1$$

#$%$$$

(#)

(0) 1*%$$$ 1*%*$$ (1)

7$%$$$

E*%$$$ *%$$$ *$%$$$ #1%E$$ (*)

7$%$$$ E*%$$$ *%$$$ *$%$$$

)111%7$$ Total unsecured debt P )#1$%E$$

Common stoc&% )1$$%$$$5 retained earnings deficit% ()#$%$$$)5 cash e(pended for travel% ()*$$)5 accrued interest receivable% )#$$5 unrecorded employer's payroll ta(es% ()*$$)5 unrecorded interest on mortgage% ()#%1$$)5 bill for last year's audit% ()*%$$$)5 and probable damage suit judgment% ()*$%$$$). 3stimated settlement per dollar of unsecured liabilities3stimated amount available for unsecured creditors Total unsecured debt )1G#%K$$ O )$.G11 )#1$%E$$

b.

20-22

Chapter 20 - Corporations in Finanacial Difficulty

P20-9 F%+,+.%,* S&,&#8#+&( 9'" , F%"8 %+ C/,2&#" 11 P"'.##$%+5( a. 'ncome statement for a company in reorgani ation proceedings6obbes Company (/ebtor4in4+ossession) 'ncome :tatement ?or the Lear /ecember 01% #$N# ,evenue:ales Cost and 3(pensesCost of Foods :old :elling% Aperating% and .dministrative 'nterest (contractual interest )*1%$$$) 3arnings before ,eorgani ation 'tems and 'ncome Ta(es ,eorgani ation 'tems+rofessional ?ees 'nterest 3arned on .ccumulated Cash ,esulting from Chapter 11 +roceeding Total ,eorgani ation 'tems 'ncome before 'ncome Ta( and /iscontinued Aperations 'ncome Ta( 'ncome before /iscontinued Aperations /iscontinued AperationsAperating =oss% Bet4of4Ta( Fain on :ale of .ssets% Bet4of4Ta( Bet /iscontinued Aperations Bet =oss )(1K%$$$) G%$$$ ) )(1*%$$$) 0%$$$ (1#%$$$) ) 1$%$$$ (*%$$$) *%$$$ )#1K%$$$ 17$%$$$ *$%$$$ 1%$$$ )##1%$$$ ) ##%$$$

(7%$$$) ) (#%$$$)

20-23

Chapter 20 - Corporations in Finanacial Difficulty

P20-9 (continued) b. :tatement of cash flo!s for a company in reorgani ation proceedings6obbes Company (/ebtor4in4+ossession) :tatement of Cash ?lo!s ?or the Lear /ecember 01% #$N# Cash ?lo!s from Aperating .ctivitiesCash ,eceived from Customers Cash +aid to :uppliers and 3mployees 'nterest +aid Bet Cash +rovided by Continuing Aperating .ctivities before ,eorgani ation 'tems Aperating Cash ?lo!s from ,eorgani ation .ctivities+rofessional ?ees 'nterest ,eceived on Cash .ccumulated >ecause of Chapter 11 +roceeding Bet Cash "sed by ,eorgani ation 'tems Aperating Cash ?lo!s from /iscontinued AperationsBet Cash "sed by /iscontinued Aperations Bet Cash +rovided by Aperating .ctivities Cash ?lo!s +rovided by 'nvesting .ctivities+roceeds from :ale of .ssets /ue to Chapter 11 +roceeding Bet Cash +rovided by 'nvesting .ctivities Cash ?lo!s +rovided by ?inancing .ctivitiesBet >orro!ings under :hort4Term ?inancing +lan +rincipal +ayments on +re4petition /ebt .uthori ed by Court (>onds +ayable) Bet Cash +rovided by ?inancing .ctivities Bet 'ncrease in Cash Cash at Ianuary 1% #$N# Cash at /ecember 01% #$N# ) #K1%$$$ (#$K%$$$) (1%$$$) ) *1%$$$

) (1*%$$$) 0%$$$ ) (1#%$$$) ) (0%$$$)

) 0G%$$$

) 1E%$$$ ) 1E%$$$ ) 1$%$$$ ) (1$%$$$) 4$4

) *7%$$$ 1*%$$$ ) 7#%$$$

20-24

Chapter 20 - Corporations in Finanacial Difficulty

P20-9 (continued) c. >alance sheet for a company in reorgani ation proceedings6obbes Company (/ebtor4in4+ossession) >alance :heet /ecember 01% #$N# Cash .ccounts ,eceivable (net) 'nventory Total Current .ssets +roperty% +lant% and 3quipment (net) Total .ssets .ssets ) 7#%$$$ 17%$$$ EE%$$$ )#$7%$$$ 1K$%$$$ )KK7%$$$

=iabilities =iabilities Bot :ubject to CompromiseCurrent =iabilities (post petition):hort4Term >orro!ings .ccounts +ayable 4 Trade Total =iabilities Bot :ubject to Compromise =iabilities :ubject to Compromise (pre4petition).ccounts +ayable Botes +ayable% 1$7 >onds +ayable% 1#7 .ccrued 'nterest +ayable Total =iabilities :ubject to Compromise Total =iabilities :hareholders' 3quity +referred :toc& Common :toc& ()1 par) .dditional +aid4'n Capital ,etained 3arnings (/eficit) Total :hareholders' 3quity Total =iabilities and :hareholders' 3quity P

) 1$%$$$ 7%$$$

) 17%$$$

) 10E%$$$ 17$%$$$ #1$%$$$P 17%$$$

*G*%$$$ )K1#%$$$

) *$%$$$ *$%$$$ 7*%$$$ (1#$%$$$)

) **%$$$ )KK7%$$$

)1$%$$$ payment approved by the Court% reducing pre4petition bonds payable from )#*$%$$$ to )#1$%$$$.

20-25