(1)
Olds Company declares Chapter 7 bankruptcy. The following are the asset and liability book values at that time; administrative expenses are estimated to be $12,000:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,000
Accounts receivable. . . . . . . . . . . . . . . . 60,000 (worth $28,000)
Inventory . . . . . . . . . . . . . . . . . . . . . . . . 70,000 (worth $56,000)
Land (secures note A) . . . . . . . . . . . . . . 200,000 (worth $160,000)
Building (secures bonds) . . . . . . . . . . . . 400,000 (worth $320,000)
Equipment. . . . . . . . . . . . . . . . . . . . . . . 120,000 (worth unknown)
Accounts payable . . . . . . . . . . . . . . . . . 180,000
Taxes payable to government. . . . . . . . 20,000
Note payable A . . . . . . . . . . . . . . . . . . . 170,000
Note payable B . . . . . . . . . . . . . . . . . . . 250,000
Bonds payable . . . . . . . . . . . . . . . . . . . . 300,000
The holders of note payable B want to collect at least $125,000. To achieve that goal, how much does the company have to receive in the liquidation of its equipment?
(2)
Kansas City Corporation holds three assets when it comes out of Chapter 11 bankruptcy:
Book Value Fair Value
Inventory . . . . . . . . . . . . . . . . . . . . . . $ 86,000 $ 50,000
Land and buildings . . . . . . . . . . . . . . . 250,000 400,000
Equipment . . . . . . . . . . . . . . . . . . . . . 123,000 110,000
The company has a reorganization value of $600,000.
a. Describe the rules to determine whether to apply fresh start accounting to Kansas City.
b. If fresh start accounting is appropriate, how will this company's assets be reported?
c. If a Goodwill account is recognized in re-organization, where should it be reported? What happens to this balance?