Chapter 18

Corporate Liquidation and Reorganization

E18-1

1. B
2. D
3. C
4. D

E18-2

1) A
2) D
3) C
4) D

E18-4

Partially secured bonds payable $ 350,000

Amount secured by 50% of plant assets realization

(50%  $500,000) ($ 250,000)

Unsecured portion of bonds payable $ 100,000

Total available portion of Madeline SA’s plant assets realization

for unsecured creditors $ 250,000
Total claim of unsecured creditors ($250,000/10%) $2,500,000

Expected payment for the bonds payable unsecured portion:

𝑢𝑛𝑠𝑒𝑐𝑢𝑟𝑒𝑑 𝑝𝑜𝑟𝑡𝑖𝑜𝑛 𝑜𝑓 𝑏𝑜𝑛𝑑𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒
= ( 𝑇𝑜𝑡𝑎𝑙 𝑐𝑙𝑎𝑖𝑚 𝑜𝑓 𝑢𝑛𝑠𝑒𝑐𝑢𝑟𝑒𝑑 𝑐𝑟𝑒𝑑𝑖𝑡𝑜𝑟𝑠  total available assets for unsecured
creditors)
$100,000
= ($2,500,000  $250,000)

= $10,000

Total expected payment for the bond payable ($250,000 + $10,000)

$260,000

P18-1 (in thousand)

Allowed claim subject to compromise 1,500

Total liabilities $1,500
Less: Reorganization value* (1,250)
Excess liabilities over reorganization value $ 250

*Reorganization Value
Taxes payable $ 100
Current portion of senior debt, cash payable 50
Senior debt, 12% bonds 150
Subordinate debt 300
Common stock 650
$1,250

Having the above calculations, Tessa Ltd. met the two conditions for a
fresh-start reporting, given that:

1. The excess liabilities over reorganization value indicate that the first
condition of fresh-start reporting is met.
2. The reorganization plan calls for the old equity holders of $900 common
stock to retain $250 new common stocks of the reorganized entity. This
shows that Don SA stockholders own less than 50 per cent of the
emerging company. Therefore the second condition is also met.

P18-4 (in thousand)

1 POP INC. STATEMENT OF AFFAIRS

Pop Inc. Statement of Affairs on August 1, 2014
Assets
Estimated
Realizable Estimated
Values Less Realizable
Secured Value Available
Book Creditor for Unsecured
Value Liabilities Creditors
Pledged for secured creditors
$775 Fixed Assets - net $475
Less: Bond payable (500)
$ 0
Available for priority and unsecured
creditors
250 Cash and equivalents 250
 150 Accounts receivable 125
200 Inventories 100
Total available for priority and unsecured 475
creditors
Less: Priority liabilities (150)
Total available for unsecured creditors 325
______ Estimated deficiency 25
$1,375 $350

Liabilities and Stockholders’ Equity

Book Secured and Unsecured
Value Priority Non-priority
Claims Claims
Fully secured creditors
$500 Bond payable $500
Less: fixed assets (475) $25
pledged as security

Priority liabilities
150 Wages payable 150
650

Unsecured creditors
200 Account payable $200
125 Interest payable 125

Stockholders’ equity
550 Common stock
(150) Retained earnings ______
$1,375 Total unsecured non-priority claims $350
2 ESTIMATED PAYMENTS PER DOLLAR TO EACH CLASS OF CLAIMS:

Cash Available $950

Distribution to partially secured and priority creditors:

Bond payable (secured portion) $475
Administrative expense 250
Wages payable 150 875

Available to unsecured non-priority creditors (A) $75

Unsecured non-priority creditors:

Account payable 200
Bond payable (unsecured portion) 25
Interests payable 125
Total unsecured non-priority claims (B) $350

Per dollar pro rata distribution for unsecured non-priority creditors:

A/B = $75/$350 = $0.21

a. Payments for partially secured class

Bond payable (secured portion) $475
Bond payable (unsecured portion)
$0.21  $25 5.25 $480.25
b. Payments for unsecured priority class
Administrative expense $250
Wages payable 150
Total unsecured priority class payment $400

c. Payments for unsecured non-priority class

Account payable ($0.21  $200) 42
Interests payable ($0.21  $125) 26.25
Total unsecured non-priority payment $ 68.25