ISMChap013

Chapter 13 - Accounting for Legal Reorganizations and Liquidations
12850CHAPTER 13
ACCOUNTING FOR LEGAL REORGANIZATIONS
AND LIQUIDATIONS
Chapter Outline
I. Because of a myriad of possible financial or business difficulties, a company may become
insolvent, unable to pay its debts as they come due.
A. To ensure the equitable treatment of all parties involved with an insolvent company
(stockholders as well as creditors), laws have been written to provide structure for the
bankruptcy process in the United States.
B. At present, legal guidance is provided primarily by the Bankruptcy Reform Act of 1978
as amended.
1. This law attempts to arrive at a fair distribution of a debtor's assets.
2. It also seeks to discharge the obligations of an honest debtor.
II. Bankruptcy proceedings can be formally instigated by either the debtor or a group of
creditors.
A. A voluntary petition is filed with the court by the insolvent company while an involuntary
petition must be filed by a minimum number of creditors with, at least, a minimum level
of debt.
B. After a bankruptcy petition is received, normally the court will grant an order for relief to
halt all actions against the debtor.
III. Within the bankruptcy process, determining the appropriate classification of every creditor
is an important step in achieving a fair settlement.
A. Fully secured creditors hold a collateral interest in assets of the insolvent company
having a value in excess of the related liability.
B. Partially secured creditors also have a collateral interest but the expected net realizable
value will not satisfy the entire obligation.
C. Some unsecured obligations (including administrative expenses, certain debts to
employees, and government claims for unpaid taxes) have priority over other
unsecured debts.
D. All remaining unsecured creditors will receive assets from the debtor only after all of the
above claims have been satisfied.
IV. A Statement of Financial Affairs is frequently produced by an insolvent company to

disclose its current financial position.
A. Assets are reported at net realizable value along with the disclosure of any pledged
amounts. Liabilities are classified according to the security or priority of the creditor.
B. A Statement of Financial Affairs is especially useful if prepared at the beginning of the
bankruptcy process to assist all parties in evaluating the outcome of various actions.
C. Most of the asset balances reported in this statement are merely estimations,
projections of future events.
V. Bankruptcy proceedings often conclude with the assets of the debtor being liquidated to
satisfy creditor claims (a Chapter 7 bankruptcy).
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Education.
A. A trustee is appointed to oversee termination of business affairs, liquidation of noncash

properties, and distribution of cash resources.
B. The trustee prepares a periodic reporting of activities. Historically, that reporting has
been in the form of a Statement of Realization and Liquidation.
1. This statement indicates the book value and classification of remaining assets and
liabilities.
2. It also discloses the effects of all transactions that have occurred to date.
3. This statement is no longer appropriate for external reporting but can still be
produced internally to help monitor the activities.
C. At the point that liquidation becomes imminent, financial reporting must follow the
liquidation basis of accounting.
1. Liquidation is viewed as imminent when a plan has been approved by the court or
by
individuals with that authority.
2. Under the liquidation basis, both a statement of net assets in liquidation and a
statement of changes in net assets in liquidation must be produced.
3. Assets are reported under the liquidation basis at the cash amount that is expected
which will often be lower than fair value. Liabilities are not adjusted until changed
in
some legal fashion.
Vl. As an alternative to liquidation, a company may seek to stay in business and attempt to
return to solvency (a Chapter 11 bankruptcy).
A. A reorganization plan has to be devised that can win the approval of each class of
creditors and each class of stockholders as well as the bankruptcy court.
B. Reorganization plans normally lay out a specific course of action designed to save the
company and can include proposed changes in operations, methods of generating
additional working capital, and a settlement of the debts that were in existence on the
day that the order for relief was entered.
Vll. Financial reporting during reorganization is important to allow parties to follow the progress
being made.
A. FASB’s Accounting Standards Codification, Topic 852, Reorganizations provides
guidance for preparing financial statements during the period that a company goes
through reorganization.
1. Gains, losses, revenues, and expenses that result from reorganization must be
reported separately on the income statement.
2. Professional fees incurred in connection with the bankruptcy must be expensed
immediately.
3. Liabilities subject to compromise are reported on the balance sheet based on the
expected amount of the allowed claims.
VIII. Fresh start accounting is often required when a company emerges from reorganization.
A. Assets are restated to current value but only if the fair value of assets is less than the
allowed claims and the original owners are left holding less than 50 percent of
company.
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B. The recognition of goodwill may also be required if the reorganization value of the
emerging company is greater than the value of the identifiable assets (both tangible
and intangible).
C. Retained earnings must be set at zero to indicate that a new entity has been formed.
Answers to Discussion Questions
What Do We Do Now?
Students are given a chance in this case to look at a non-accounting business decision: the
forcing of a valued client into bankruptcy. Thurber has already committed several unfortunate
mistakes in this case. For example, he has seen a dramatic slowdown in cash payments by
Abraham and Sons without seeking any further information about the prospects of the client.
Furthermore, he has let the treasurer pressure him into providing additional credit without any
valid justification. He is now being pushed by another company into filing a bankruptcy petition
without adequate assurance that Abraham and Sons has a real problem.
Because Thurber has not acted earlier, he should now request audited financial statements
from Abraham and Sons so that he can make a reasonable decision as to the course of action
to take. Once successful companies can falter and go bankrupt creating huge losses for their
creditors. Thurber needs to assess the risk and take appropriate action.
Many important figures can be gleaned from the company’s financial statements including the
amount of working capital, the current ratio, the debt to equity ratio, the trend in sales, the
trend in long-term debt, operating cash flows, the gross profit percentage, any expenses that
have risen at a fast rate, the amount of property that has been mortgaged, and the like.
Thurber should then ask for a face-to-face meeting with the treasurer (or another officer) of
Abraham and Sons. In this meeting, Thurber should discuss the possibility of having the
current debt secured in some manner as protection. The development of a formal repayment
schedule would also be wise.
If Thurber is not satisfied by the financial statements and the discussion with the client, he
should meet with the clothing manufacturer who has called as well as with a lawyer and/or
accountant. They should discuss possible actions and the outcomes that could result from
each. Inevitably, if loss of the receivable seems probable unless some action is taken, filing an
involuntary petition for bankruptcy may be the wisest decision. However, that procedure should
only be undertaken after adequate study has been made. In the long run, companies do not
prosper by having their clients go into bankruptcy.
Students often address this type of case as either a black or white issue: give more credit or
force the debtor into bankruptcy. The case simply does not provide enough data to arrive at
either choice. Thus, the students should be directed to consider the types of information that
could prove to be beneficial in making this decision. Often, in decision-making, the gathering of
information is the key step in arriving at the proper conclusion.
How Much Is That Building Really Worth?
College textbooks frequently present fair value as if it were a known number that was easily
determined. Students may view an asset’s fair value as if getting that much money was
virtually assured. Thus, they often believe that producing a statement of financial affairs
requires little more than establishing and reporting what a buyer will pay for an asset.
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This case was written to emphasize that net realizable value might actually be no more than a
wild guess. Obviously, the value of most stocks and many bonds can be determined with
accuracy. However, other assets such as the building in this case might eventually prove to
have a liquidation value that can vary from zero (many deserted buildings are simply never
sold because no one wants to buy that type of building in that particular location even if it is in
great condition—many cities are filled with such structures) up to a significant amount.
The accountant faces the problem of preparing a statement of financial affairs that requires
that a single number be reported as the value of each asset. Users of this statement can then
make important financial decisions based on the number that is presented. Subsequently, the
actual amount received may be significantly higher or lower than the figure shown. The users
of the information may feel as if they have been mislead when, in fact, the accountant made
the best estimate possible.
Given the problems faced in determining fair value, the accountant will probably seek a very
conservative number for reporting purposes. In most cases, less potential damage will be
created by reporting a relatively low figure. However, use of a particularly low value may tempt
the creditors to allow the company to reorganize because little would seem to be gained by
forcing liquidation. For this reason, a conservative approach can favor the company
attempting to avoid liquidation.
Probably the most important lesson from this case is that decision makers should look with
skepticism on many of the numbers reported as representing fair value. In some cases, fair
value is a figure that can only be estimated and may depend on a number of factors that
cannot be anticipated in advance by the accountant or by anyone else.
Is this the Real Purpose of the Bankruptcy Laws?

During the 1980s, as described in this case, the US saw a rash of bankruptcies that were filed
to resolve major financial problems. Previously, bankruptcy laws had been used almost
exclusively to settle insolvency problems. However, if a voluntary petition is filed and accepted
by the courts, companies are provided with a method of settling issues before actual
insolvency occurs. Sometimes the final results are good for the companies but not always. A.
H. Robins, for example, had to agree to be bought as one of the conditions of its
reorganization. In effect, the company lost its independence in order to satisfy the lawsuits
resulting from Dalkon Shield litigation.
As with many of the discussion questions in this book, this case is intended to alert students to
a real-life issue and encourage them to consider the ramifications. To function in society,
accounting students must know more than just the mechanical aspects of a bankruptcy. What
are the objectives of the bankruptcy laws and do these particular cases fall outside of those
objectives? Would either Manville or its claimants, for example, have been better served by
having the company slowly pulled into insolvency over years or perhaps decades? Should a
different set of bankruptcy laws be established for companies having these types of financial
crises? Although these questions are not directly related to accounting, they are the types of
questions that accountants (both as business people and as citizens) need to address.
Answers to Questions
1. "Insolvent" refers to a state of financial position whereby a company (or individual) is

unable to pay debts as they come due.
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2. In the United States today, the primary piece of federal legislation that governs most
bankruptcy proceedings is the Bankruptcy Reform Act of 1978 and its subsequent
amendments.
3. Bankruptcy cases have two overriding objectives:

— To achieve a fair distribution of assets to the various parties that are involved with an
insolvent company (or individual) and
— To discharge the obligations of an honest debtor.
4. A voluntary bankruptcy petition is one filed by an insolvent company to gain protection from
its creditors. Creditors may also seek to prevent or limit losses by filing their own
(involuntary) petition. Where a company has at least 12 unsecured creditors, a minimum of
three (having total unsecured debts of over $15,325) must sign an involuntary petition. If
fewer than 12 unsecured creditors exist, only one is needed to file the petition but the
minimum debt level remains at $15,325.
5. The granting of an order for relief halts all actions against an insolvent company. The order
for relief provides the company as well as the creditors with time to decide on a future
course of action. It also brings the court into the process and provides a structure for what
might otherwise be a chaotic event, the distribution of assets to the parties involved.
6. A fully secured creditor has an obligation from an insolvent company but holds a collateral
interest in assets that have a value in excess of the debt. Thus, these parties can assume
that they will suffer no loss regardless of the outcome of the bankruptcy proceedings. A
partially secured creditor also has a collateral interest but the liability is larger than the
anticipated proceeds from the realization of the attached assets. A portion of the liability is
covered but a risk of loss still exists in connection with the remaining debt. Unsecured
creditors have no collateral interest and can only hope to collect after the various secured
interests have been satisfied. Obviously, this last group of creditors has the highest chance
of incurring a loss.
7. A liability classified "with priority" is still unsecured. However, because of provisions of the
Bankruptcy Reform Act of 1978, these debts must be paid before any other unsecured
obligations. Thus, the chance of loss is reduced, sometimes significantly. Unsecured
liabilities having priority include the following:
— Claims for administrative expenses,

— Obligations arising between the date that a bankruptcy petition is filed and the
appointment of a trustee or the issuance of an order for relief.
— Employee claims for wages earned during the 180 days preceding the filing of a
bankruptcy petition (limited to $12,475 per person),
— Employee claims for contributions to a benefit plan earned during the 180 days
preceding the filing of a bankruptcy petition (within certain restrictions),
— Deposits made with the company to acquire goods or services (up to a $2,775 limit),
— Government claims for unpaid taxes.
8. Administrative expenses are classified as liabilities with priority to offer some protection to
those individuals who serve the company during the period of insolvency. Without a
legitimate chance for monetary reward, few people would be willing to provide the various
administrative services needed during the bankruptcy process. Also, these debts were
incurred after the order for relief.
9. In a Chapter 7 bankruptcy, the assets of the insolvent company are liquidated to satisfy the
claims of the creditors. Business activities cease and noncash assets are sold. Conversely,
in a Chapter 11 bankruptcy, the company attempts to survive its financial problems and
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return to solvency. A reorganization plan is developed that will allow the company to
continue operations and reach a settlement of its debts. This reorganization plan must be
accepted by each class of creditors, each class of stockholders, and the court.
10. Unsecured creditors often face the possibility of absorbing substantial losses in a Chapter
7 liquidation because their claims rank below fully secured and partially secured liabilities.
Frequently, little or nothing is expected. Because of this possibility, unsecured creditors
may feel that they have a better chance of limiting their losses by agreeing to a
reorganization plan to keep the company alive as a potential future customer.
11. The statement of financial affairs helps the parties involved with a bankruptcy to anticipate
their potential losses. It reports all assets of the insolvent company at net realizable value
whereas liabilities are classified as fully secured, partially secured, with priority, and
unsecured. Based on the potential cash inflows and outflows, an estimation can be made
of the losses that will be incurred by each group of claimants. A statement of financial
affairs is considered especially useful at the beginning of the bankruptcy process since it
can assist the parties in evaluating the outcome of various possible actions.
12. In general, a trustee is assigned to prevent loss of the insolvent company's assets and
oversee the liquidation and distribution process. A number of rather procedural tasks are
normally accomplished by the trustee shortly after appointment such as notifying the post
office, changing locks, obtaining possession of corporate records, and opening a new bank
account. Thereafter, the trustee might have to operate the company for a period of time to
complete any business still in process. The trustee also has the power to void any transfer
made by the debtor within 90 days prior to the filing of the bankruptcy petition if the
company was insolvent at the time. Subsequently, the trustee works to liquidate noncash
assets and make appropriate disbursements to the various claimants. During this entire
process, the trustee needs to make periodic reportings to the court and other interested
parties.
13. A trustee can demand the return of any payment (or other asset transfer) made within 90
days prior to the filing of a bankruptcy petition if the company was already insolvent. This
legal procedure is known as the voiding of a preference transfer and is intended to prevent
one party from gaining an unfair advantage over the remaining claimants. In effect, the
payment is viewed as a distribution of the insolvent company's assets, a process that is to
be controlled solely by the trustee and the court.
14. A statement of realization and liquidation is designed to report (1) the account balances of
the insolvent company at the date the order for relief is entered, (2) the liquidation of
noncash assets, (3) the cash distributions made to the various claimants, (4) any other
transactions incurred during this period, and (5) any remaining asset and liability balances.
Because of changes in U.S. GAAP, this statement is normally limited for internal reporting
purposes.
15. A company must follow the liquidation basis of accounting once liquidation becomes
imminent. That point is reached when a plan of liquidation has been approved by the
appropriate court or by individuals who have the authority to make that decision.
16. Liquidation is viewed as imminent (so that the liquidation basis of accounting is necessary)
if a formal plan of liquidation has been approved by the court in charge or by individuals
who have the authority to make that decision.
17. When a company is viewed as being in liquidation, then, at a minimum, a statement of net
assets in liquidation and a statement of changes in net assets in liquidation are required.
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18. If the liquidation basis of accounting is applied, assets are reported at the amount of cash
that is expected from that liquidation. Because assets often have to be liquidated rather
quickly, the amount of cash expected is often a lower amount than the fair value of those
assets.
19. If the liquidation basis of accounting is applied, liabilities continue to be reported based on
the amount of each claim. The accountant does not attempt to estimate the amount that
will have to be paid until formal agreements have been reached.
20. During the liquidation of an insolvent company, control is turned over to an outside trustee.
However, in a Chapter 11 bankruptcy (a reorganization), operations will usually be
continued so that an attempt can be made to arrive at a plan to save the company. While
the bankruptcy proceeds, control is normally retained by the ownership, a group that is
legally referred to as the debtor in possession.
21. In a Chapter 11 bankruptcy, the debtor in possession (the present ownership of the
company) is given the initial opportunity of filing a reorganization plan with the court. If a
formal proposal is not put forth by the debtor in possession within 120 days of the order for
relief or is not accepted within 180 days, any interested party has the right to submit a plan.
Bankruptcy proceedings often drag on for lengthy periods because the time limitations can
be extended by the court. However, the debtor’s exclusivity to propose a plan cannot be
extended beyond 18 months. In recent years, debtors have begun to push for quicker
resolutions so that matters can be finalized even if liquidation becomes necessary.
22. Numerous types of proposals are found in reorganization plans. For example, many will set
forth specific ideas for changes to be made in the company's operations (to increase
profitability) such as selling assets, closing stores, or terminating complete lines of
business. In addition, most reorganization plans identify sources that will be tapped in the
future to generate additional funding. Proposed changes in management (and the board of
directors) may also be spelled out in an attempt to persuade claimants that the company
will have the ability to overcome past economic problems. Last, and probably most
important, a reorganization plan must include some anticipated settlement of the claims
against the company that were in existence at the time the order for relief was entered.
Before any reorganization plan is approved, the creditors (as well as the court) must be
convinced that the financial rewards will outweigh the amounts that could be received from
liquidation.
23. To become effective, a reorganization plan must be accepted by all interested parties. For
approval, each class of creditors (more than two-thirds in dollar amount and one-half in
number) must vote for the proposal. Each group of stockholders (two-thirds of the shares
being voted) must also accept the plan. The court will then confirm the reorganization plan
but only if the court feels that all parties are being treated fairly. The court also has the
authority to confirm a proposal even if not accepted by the creditors or stockholders. This
procedure (known as a "cram down") is only used if the plan is judged to be fair and
equitable.
24. A "cram down" is a legal provision whereby the court can confirm a reorganization proposal
for an insolvent company even though the plan has not been accepted by a particular class
of creditors or stockholders. This step is not taken unless the court believes the plan being
put forth is fair and equitable.
25. During reorganization, some debts are in jeopardy of being settled at a significantly
reduced amount whereas others will probably be paid at face value. Unsecured and
partially secured liabilities are likely to be settled at a lowered figure. Conversely, fully
secured liabilities and any debts incurred during the reorganization period are normally not
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at risk of being reduced. Thus, if a balance sheet is produced while a company is in

reorganization, all liabilities are reported as either being subject to compromise (reduction)
or not being subject to compromise. The debts subject to compromise are reported at the
expected amount of allowed claims rather than at an estimate of the settlement figure.
Such estimations are often difficult, if not impossible, to make.
26. A company going through a Chapter 11 bankruptcy will report specified reorganization
items on its income statement separately from operating figures. However, these
reorganization items are reported prior to income tax expense rather than in a manner
similar to an extraordinary item. These separately disclosed figures include gains and
losses on the sale of assets necessitated by the reorganization. Professional fees incurred
in connection with the reorganization are also reported in a similar manner as well as any
interest revenue that would not have been earned except for the bankruptcy proceeding.
27. Professional fees incurred during reorganization must be expensed as incurred.

Capitalization is not allowed.
28. “Fresh start accounting” refers to the adjustment of a company's assets to current value at
the time the organization emerges from bankruptcy. A company must use fresh start
accounting if two criteria are met at the time the reorganization is finalized: (1) the fair value
of the assets is less than the total allowed claims as of the date of the order for relief plus
the liabilities incurred during reorganization and (2) the original owners are left with less
than 50 percent of the voting stock.
In fresh start accounting, all assets are reported at current value while liabilities are
reported based on the present value of the settlement amounts. If the reorganization value
of the company as a whole is greater than the total fair value of the individual assets,
goodwill is reported for the excess.
Initially, in fresh start accounting, retained earnings must be reported at a zero balance.
29. Fresh start accounting is used by companies that are emerging from a bankruptcy
reorganization if the value of the assets held at that time are less than the allowed claims
associated with company’s liabilities (those present at the date of the order for relief and
those incurred since that date) and the original owners are left with less than 50 percent of
the voting stock of the reorganized company.
30. In fresh start accounting, the tangible and intangible assets of the company are reported at
their fair values. Liabilities are reported at the present value of the future cash flows.
31. When a company emerges from bankruptcy, the reorganization value of its assets as a
whole must be determined. The figure is normally computed by discounting anticipated
future cash flows from the business. This figure is then assigned to the various assets of
the company based on individual fair values. The total reorganization value may well be
greater than the current value of the individual assets. If so, the residual amount is
recorded as the intangible account Goodwill. Each year (or more often in some cases) it is
reviewed for impairment.
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Answers to Problems
1. B
2. D
3. B
4. C
5. A
6. D
7. C
8. B
9. C
10. B
11. A
12. A
13. A
14. B
15. C
16. B
17. D
18. B
19. D
20. A
21. C
22. A
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23. D
24. C
25. C
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26. (10 Minutes) (Distribution of cash in a business liquidation)
Free Assets:
Current Assets ........................................................... $ 35,000
Buildings and Equipment ......................................... 110,000
Total ..................................................................... $145,000
Liabilities with Priority:

Administrative Expenses .......................................... $ 20,000
Salaries Payable (only $3,000 per employee).......... 6,000
Income Taxes ............................................................. 8,000
Total ..................................................................... $ 34,000
Free Assets after Payment of Liabilities with Priority

($145,000 – $34,000) ................................................. $111,000
Unsecured Liabilities
Notes Payable (in excess of value of security) ...... $ 30,000
Accounts Payable ..................................................... 85,000
Bonds Payable ........................................................... 70,000
Total ..................................................................... $185,000
Percentage of Unsecured Liabilities to Be Paid: $111,000/$185,000 = 60 %
Payment on Notes Payable:

Value of Security (land) ............................................ $ 90,000
60% of Remaining $30,000 ....................................... 18,000
Total Collected............................................................ $108,000
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27. (5 Minutes) (Distribution of assets as a result of liquidation)
Liabilities with Priority
Paid first—administrative expense................................ $3,450

Paid second—wages: total of $6,225 for Rankin but only
up to a maximum of $12,475 for Key........................ 18,700
Total priority claims......................................................... 22,150
All remaining money available goes to:
Government claims to unpaid taxes......................... 4,050
Total of free assets..................................................... $26,200
No payments will be made by Xavier in connection with the remainder of (a)

the salary to Key and (b) the government claims to unpaid taxes. No
payments will be made on any of the unsecured accounts payable since no
money is left.
28. (8 Minutes) (Distribution of assets to partially secured creditors)
Free Assets:
Other Assets .............................................................. $ 80,000
Excess from Assets Pledged with Fully Secured
Creditors ($116,000 – $70,000) ............................ 46,000
Total ..................................................................... $126,000
Liabilities with Priority ................................................... $ 42,000

($126,000 – $42,000) .................................................. $ 84,000
Unsecured Liabilities:
Excess of Partially Secured Liabilities Over Pledged
Assets ($130,000 – $50,000) ................................ $ 80,000
Unsecured Creditors ................................................. 200,000
Total ..................................................................... $280,000
Percentage of Unsecured Liabilities to Be Paid: $84,000/$280,000 = 30%
Payment on Partially Secured Debt:

Value of Pledged Asset ............................................. $ 50,000
30% of Remaining $80,000 ....................................... 24,000
Total to be Collected by Holders of This Debt... $ 74,000
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29. (8 Minutes) (Distribution of assets to partially secured creditors)
Free Assets:
Cash ........................................................................... $60,000
Excess from Assets Pledged with Fully Secured
Creditors ($110,000 – $90,000)............................. 20,000
Total....................................................................... $80,000
Liabilities with Priority.................................................... 22,800
Free Assets after Payment of Liabilities with Priority.. $57,200
Excess of Partially Secured Liabilities Over
Pledged Assets ($170,000 – $140,000)................ $ 30,000
Accounts Payable...................................................... 190,000
Total ..................................................................... $220,000
Percentage of Unsecured Liabilities to be Paid: $57,200/$220,000 = 26%
Payment on Bond:
Value of Pledged Asset.............................................. $140,000
26% of Remaining $30,000........................................ 7,800
Total to be Received by holders.......................... $147,800
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30. (12 Minutes) (Liquidation of assets to satisfy debt)
The holder of Debt 2 will receive $100,000 from the sale of the pledged asset.
This creditor wants to receive $142,000 out of the total debt of $170,000.
Thus, $42,000 must be collected from the remaining debt of $70,000. That is
a payoff of 60 percent of the unsecured debt ($42,000/$70,000). To get the
additional $42,000, the company must be able to generate enough cash to (a)
pay off 100 percent of the liabilities with priority ($110,000) and (b) also pay 60
percent of the unsecured liabilities.
Unsecured Creditors ...................................................... $230,000
Excess Liability of Debt 1 in Excess of Pledged Asset
($210,000 – $180,000) ................................................ 30,000
Excess Liability of Debt 2 in Excess of Pledged Asset
($170,000 – $100,000) ................................................ 70,000
Total Unsecured Liabilities.................................. $330,000
Necessary Payoff Percentage ....................................... 60%
Cash Needed For These Liabilities ............................... $198,000
In order for the holder of Debt 2 to receive exactly $142,000, the other free
assets must be sold for $308,000. With that much money, the liabilities with
priority ($110,000) can be paid with the remaining $198,000 going to help
cover the unsecured debts of $330,000. That is 60 percent coverage of those
debts ($198,000/$330,000). This 60 percent figure would insure that the
holder of Debt 2 would get $100,000 from the pledged asset and $42,000
($70,000 x 60%) from the free assets.
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31. (8 Minutes) (Payments to be made on unsecured and partially secured

liabilities)
a. The unpledged assets of $310,000 must be added to any excess to be

received from assets pledged on fully secured debts ($220,000 – $160,000 =
$60,000) to get amount of free assets available of $370,000.
Amount Available ........................................................... $370,000

Liabilities with Priority ................................................... (182,800)
Available for Unsecured Creditors .......................... $187,200
Accounts Payable ........................................................... $400,000

Partially Secured Debt in Excess of Pledged
Assets ($510,000 – $390,000)....................................... 120,000
Unsecured Liabilities....................................................... $520,000
Distribution to Unsecured Creditors: $187,200/$520,000 = 36%
An unsecured creditor to whom $13,000 is owed can expect to receive $4,680

($13,000 x 36%).
b. The bank will receive a total of $100,800. The secured interest will generate
$90,000 (for the $120,000 note). The remaining $30,000 liability is unsecured
so that only an additional payment of $10,800 (36%) can be expected.
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32. (20 Minutes) (Distribution of cash assets resulting from liquidation)

Free Assets: (fair value)
Cash ........................................................................... $ 10,000
Inventory..................................................................... 60,000
Equipment................................................................... 50,000
Total ..................................................................... $120,000
Administrative Expenses .......................................... $ 20,000
Income Taxes ............................................................. 30,000
Total ...................................................................... $ 50,000
($120,000 – $50,000) .................................................. $ 70,000
Unsecured Liabilities
Note Payable A (in excess of value of security) ..... $ 20,000
Note Payable B (in excess of value of security) ..... 80,000
Note Payable C .......................................................... 60,000
Total ..................................................................... $280,000
Payment on Note Payable A:

Value of Security (land) .................................................. $ 70,000
25% of Remaining $20,000 ............................................. 5,000
Total Collected ........................................................... $ 75,000
Payment on Note Payable B:
Value of Security (building) ........................................... $ 40,000
25% of Remaining $80,000 ............................................. 20,000
Total Collected ........................................................... $ 60,000
Payment on Note Payable C (unsecured):
25% of $60,000 ................................................................ $ 15,000
Payment on Administrative Expenses:
As a liability with priority, the entire amount due is paid. $ 20,000
Payment on Accounts Payable (unsecured):
25% of $120,000 .............................................................. $ 30,000
Payment on Income Taxes Payable:
13-16
Education.
33. (15 Minutes) (Liquidation of assets to satisfy debt)
Note payable B is unsecured. The holders want at least $129,000 of the total
balance of $258,000. Thus, at least enough money must become available to
pay 50 percent of the unsecured debts ($129,000/$258,000). All values for
assets are known except for the company’s equipment.
Accounts payable....................................................... $188,000
Note payable A—unsecured portion (186,000-168,000) 18,000
Note payable B .......................................................... 258,000
Total ..................................................................... $464,000
Free Assets (except for equipment):

Cash ........................................................................... $32,000
Accounts receivable.................................................. 36,000
Inventory..................................................................... 64,000
Land (value does not cover related debt)................ -0-
Buildings ($336,000 less $308,000
in bonds)................................................................ 28,000
Total ..................................................................... $160,000
Less: Liabilities with Priority:

Estimated administrative expenses......................... (20,000)
Taxes payable to government................................... (28,000)
Total free assets except for equipment.............. $112,000
In order for unsecured creditors to receive 50 percent of their claims, $232,000

in free assets must be available (50 percent of the $464,000 in total unsecured
debts). At present only $112,000 is available. Thus, $120,000 must be
received from the liquidation of the equipment to have the needed resources
($232,000 – $112,000).
13-17
Education.
34. (15 Minutes) (Payment of various liabilities as a result of liquidation)

Free Assets:
Cash ..................................................................... $30,000
Receivables (30 percent collectible)........................ 15,000
Inventory..................................................................... 39,000
Land (value in excess of secured note:
$120,000 – $110,000)............................................. 10,000
Total ..................................................................... $94,000
Less: Liabilities with priority

Salary payable (below maximum)........................ (10,000)
Free assets available............................................ $84,000
Bonds payable (less secured interest in
building: $300,000 – $180,000)............................ 120,000
Unsecured liabilities............................................. $210,000
Percentage of unsecured liabilities to be paid: $84,000/$210,000 = 40%
Amounts to be paid for:

Salary payable (liability with priority to be paid
in full)..................................................................... $10,000
Accounts payable (unsecured—will collect 40%
of debts of $90,000).............................................. $36,000
Note payable (fully secured by land—will collect
entire balance)...................................................... $110,000
Bonds payable (partially secured—will collect
$180,000 from building and 40 percent of the
remaining $120,000).............................................. $228,000
35. (2 Minutes) (Reporting of debts during liquidation)
Because of the uncertainty about the amount that will be paid on an

unsecured debt, no attempt is made in financial reporting to anticipate the
payment. Liabilities are reported at the expected amount of the allowed claim.
In this case, the creditors apparently have a legitimate claim of $200,000.
13-18
Education.
36. (9 Minutes) (Adjusting a company’s records to fresh start accounting as it

comes out of bankruptcy)
The individual assets of Larisa Company have a total fair value of $700,000
but a reorganization value of $760,000. Thus, an intangible asset (Goodwill)
equal to the $60,000 must be recognized.
In addition, the retained earnings deficit must be eliminated and all other
asset and liability accounts adjusted to the value on the day that the company
exits from bankruptcy.
Because common stock was transferred directly from the previous owners to
the creditors, no entry is needed for the stock account. Because the
reorganization value is $760,000 but liabilities are $300,000, stockholders’
equity must be $460,000. Retained earnings will be zero and common stock
will remain $330,000. Thus, additional paid-in capital should be adjusted to
$130,000 ($460,000 less $330,000).
Receivables ($90,000 - $80,000) .................................... 10,000

Inventory ($210,000 - $200,000)...................................... 10,000
Buildings ($400,000 - $300,000)...................................... 100,000
Goodwill ........................................................................... 60,000
Retained Earnings................................................ 70,000
Additional Paid-In Capital
($130,000 – $20,000)........................................ 110,000
13-19
Education.
37. (15 Minutes) (Prepare income statement for company going through a
bankruptcy reorganization)
ADDISON CORPORATION
Income Statement
Revenues ........................................................................ $ 467,000

Costs and expenses:
Cost of goods sold .................................................... $ 211,000
Rent expense ............................................................. 16,000
Salaries........................................................................ 70,000
Depreciation expense ............................................... 22,000
Advertising expense ................................................. 24,000
Interest expense ........................................................ 4,000 (347,000)
Earnings before reorganization items and tax effects. 120,000
Reorganization items:
Loss on closing of branch ...................................... (109,000)
Professional fees ...................................................... (71,000)
Interest revenue ......................................................... 32,000 (148,000)
Loss before income tax benefit .................................... (28,000)
Income tax benefit (20 percent) .................................... 5,600
Net loss ..................................................................... $(22,400)
13-20
Education.
38. (15 Minutes) (Description of balance sheet for a company emerging from
a. FASB ASC Topic 852 (Reorganizations) states that a company that is exiting
bankruptcy is considered a new entity (so that fair values would be applicable
for reporting purposes) if two criteria are met. Otherwise, the company is
simply considered to be a continuation of the old concern, a company that
should keep reporting its historical cost figures.
The first criterion is that the fair value of the assets of the emerging company
must be less than the allowed claims as of the date of the order for relief (plus
liabilities incurred during reorganization).
The second criterion is that the original owners must be left with less than 50
percent of the voting stock of the emerging company.
Whenever both of these criteria are met, the company's assets should be
reported at their current fair values.
b. Under fresh start accounting, the assets are adjusted to current value on the
date that the company successfully emerges from bankruptcy reorganization.
A reorganization value for the entity’s assets as a whole is first determined by
discounting the cash flows that are anticipated. This balance is assigned to
identifiable assets (both tangible and intangible) in the same manner as in a
purchase combination. Any amount of the reorganization value that exceeds
the assigned total is recorded as goodwill.
c. The reorganization value in excess of the value of the identified assets and
liabilities is reported as the intangible asset goodwill. Goodwill is reviewed
each year for impairment.
13-21
Education.
39. (15 Minutes) (Prepare a balance sheet for a company in bankruptcy

reorganization)
JAEZ CORPORATION
Balance Sheet
December 31, 2015
Current assets:
Cash ........................................................................... $ 23,000
Inventory .................................................................... 45,000 $ 68,000
Land, buildings, and equipment:

Land ........................................................................... 140,000
Buildings .................................................................... 220,000
Equipment................................................................... 154,000 514,000
Total assets .......................................................... $582,000
Liabilities not subject to compromise

Current liabilities:
Accounts payable ................................................ $ 60,000
Long-term liabilities:
Note payable (due 2017) ................ $110,000
Note payable (due 2018) ................ 100,000 210,000 $ 270,000
Liabilities subject to compromise

Accounts payable ...................................................... 123,000
Accrued expenses ..................................................... 30,000
Income taxes payable ............................................... 22,000
Note payable (due 2020) ........................................... 170,000 345,000
Total liabilities....................................................... 615,000
Stockholders' equity
Common stock .......................................................... 200,000
Retained earnings (deficit) ....................................... (233,000)
Total liabilities and shareholders' (deficit) ........ $ 582,000
13-22
Education.
40. (40 Minutes) (Prepare journal entries for company emerging from bankruptcy
using fresh start accounting)
Preliminary computations:
BOOK VALUES PRIOR TO EMERGING FROM REORGANIZATION
— Total assets at book value = $710,000 ($100,000 + $112,000 + $420,000 +
$78,000)
— Total liabilities at book value = $800,000 ($80,000 + $35,000 + $100,000 +
$200,000 + $185,000 + $200,000)
— Total common stock = $240,000 (given)
— Deficit = $330,000 (given)
— Since the above accounts balance, no additional paid-in capital must exist at
this time.
BOOK VALUES AFTER EMERGING FROM REORGANIZATION

— Total assets = $780,000 (reorganization value)
— Total liabilities = $340,000 ($5,000 + $4,000 + $100,000 + $50,000 + $71,000 +
$110,000)
— Total common stock = $240,000 (all 18,000 returned shares are reissued)
— Deficit = -0- (eliminated by the reorganization)
— Additional paid-in capital = $200,000 (figure needed to balance above accounts
after reorganization)
— Because the company will have 30,000 shares outstanding after the
reorganization, the additional paid-in capital equals $6.66 per share
($200,000/30,000)
— Because the company has a reorganization value of $780,000 but the assets
have a fair value of only $735,000, goodwill of $45,000 must be recognized
JOURNAL ENTRIES
— Land and Buildings ................................................... 80,000
Goodwill ..................................................................... 45,000
Accounts Receivable ........................................... 20,000
Inventory ............................................................... 22,000
Equipment ............................................................ 13,000
Additional Paid-In Capital (to balance) .............. 70,000
To adjust accounts to fair value as part of fresh
start accounting.
— Common Stock .......................................................... 144,000

Additional Paid-In Capital ................................... 144,000
To record shares turned in to the company by the
owners as part of the reorganization plan, 18,000
shares at an $8 per share par value.
13-23
Education.
40. (continued)
— Accounts Payable ..................................................... 80,000

Note Payable ........................................................ 5,000
Common Stock ($8 per share par value) ........... 8,000
Additional Paid-In Capital ($6.66 per share—see
above, or 1/30 of company total) .................. 6,666
Gain on Debt Discharge ...................................... 60,334
To record settlement of accounts payable.
— Accrued Expenses ................................................... 35,000

Note Payable ........................................................ 4,000
To record settlement of accrued expenses.
— Note Payable ............................................................. 200,000

Note Payable ........................................................ 50,000
above, or 1/3 of company total) .................... 66,667
To record settlement of note payable due in 2018.
— Note Payable .............................................................. 185,000

Note Payable ........................................................ 71,000
above, or 7/30 of company total) .................. 46,667
— Note Payable ............................................................. 200,000

Note Payable ........................................................ 110,000
— Additional Paid-In Capital ($334,000 – $200,000) ... 134,000

Gain on Debt Discharge ........................................... 196,000
Retained Earnings (deficit) ................................. 330,000
To adjust additional paid-in capital to
appropriate balance, close out gain, and
eliminate deficit balance as part of fresh start
accounting.
13-24
Education.
41. (25 Minutes) (Prepare a balance sheet for a company emerging from
a. Smith Corporation must apply fresh start accounting because it meets both
requirements established by FASB:
The reorganization value of $800,000 of the company is less than the
allowed claims of $730,000 ($180,000 + $200,000 + $350,000) plus the
liabilities incurred following the order for relief of $97,000.
The original owners are left with less than 50 percent (40 percent actually)
of the voting stock.
b. Because the company has a reorganization value of $800,000 but only
$653,000 can be assigned to specific assets based on fair value, the
remaining $147,000 is reported as Goodwill.
SMITH CORPORATION
Balance Sheet
December 31, 2015
ASSETS
Current Assets:
Accounts receivable ................................................. $ 18,000
Inventory .................................................................... 111,000 $129,000
Land, Buildings, and Equipment:
Land and buildings ................................................... 278,000
Machinery ................................................................... 121,000 399,000
Intangible Assets:
Patents........................................................................ 125,000
Goodwill ..................................................................... 147,000 272,000
Total Assets .......................................................... $800,000
LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts payable ...................................................... $ 97,000
Long-term Liabilities:
Note payable (due in 2 years) .................................. $ 35,000
Note payable (due in 5 years) .................................. 50,000
Note payable (due in 8 years) .................................. 100,000 185,000
Total Liabilities ..................................................... $282,000
Stockholders' Equity:
Common stock (par value) ....................................... $500,000
Additional paid-in capital.......................................... 18,000
Retained earnings ..................................................... - 0- 518,000
Total Liabilities and Stockholders' Equity ......... $800,000
13-25
Education.
Free assets: (liquidation value)

Other assets ............................................................... $ 81,000
Assets pledged with fully secured creditors in
excess of debt ...................................................... 45,000
Total free assets ................................................... $126,000
Free assets after paying liabilities with priority

($126,000 – $36,000) ....................................................... $ 90,000
Unsecured debts:
Partially secured liabilities in excess of pledged assets
($180,000 – $103,000) ........................................... 77,000
Total unsecured debts ........................................ $360,000
Percentage of unsecured debts to be paid: $90,000/$360,000 = 25%

— Liabilities with priority collect the entire amount of $36,000
— Fully secured liabilities collect the entire amount of $200,000
— Partially secured liabilities collect $103,000 from the pledged assets and 25%
of the remaining $77,000 ($19,250) for a total of $122,250.
— Unsecured liabilities collect 25% of the $283,000 balance or $70,750.
13-26
Education.
43. (35 Minutes) (Prepare statement of financial affairs)
LIMESTONE COMPANY
Statement of Financial Affairs
June 3, 2015
Available for
Book Unsecured
Values Assets Creditors
Pledged with Fully Secured Creditors:
$400,000 Land and buildings $310,000
Less: Notes payable-long-term (190,000) $120,000
Pledged with Partially Secured Creditors:

180,000 Equipment $130,000
Notes payable—current (250,000) -0-
Free Assets:
3,000 Cash ................................................................. 3,000
65,000 Accounts receivable ....................................... 26,000
88,000 Inventory ......................................................... 80,000
Total amount available to pay liabilities
with priority and unsecured creditors...... $229,000
(listed below).............................................. (42,000)
Available for unsecured creditors ................ $187,000
Estimated deficiency....................................... 21,000
$736,000 $208,000
13-27
Education.
43. (continued)
Unsecured—
Book Nonpriority
Values Liabilities and Stockholders' Equity Liabilities

Administrative expenses ................$ 18,000
$ 10,000 Salaries payable ............................... 10,000
Taxes payable ................................... 14,000
Total ...................................................$ 42,000
Fully Secured Creditors:

190,000 Notes payable - long-term ..............$190,000
Less: Land and buildings ................(310,000) -0-
Partially Secured Creditors:

250,000 Notes payable current .....................$250,000
Less: Equipment...............................(130,000) $120,000
Unsecured Creditors:
88,000 Accounts payable (other than salaries) 88,000
198,000 Stockholders' equity....................................... - 0-
$736,000 $208,000
13-28
Education.

Free Assets:
Cash ................................................................................................ $ 6,000
Accounts Receivable ..................................................................... 18,000
Inventory ......................................................................................... 31,000
Investments ..................................................................................... 8,000
Land Value In Excess of Related Debt ($72,000 – $65,000) ....... 7,000
Total ........................................................................................... $ 70,000
Administrative Expenses (estimated) ........................................... $ 22,000
Salaries Payable .............................................................................. 6,000
Taxes Payable ................................................................................. 10,000
Total ........................................................................................... $ 38,000
Free Assets after Payment of Liabilities With Priority
($70,000 – $38,000) ....................................................................... $ 32,000
Notes Payable (in excess of value of buildings) ......................... $ 10,000
Bonds Payable (in excess of value of equipment) ...................... 80,000
Accounts Payable ........................................................................... 70,000
Total ........................................................................................... $160,000
Payment on the $65,000 of notes payable secured by land will be made in total
since the value of the land is greater than the debt.
Payment on Notes Payable (secured by buildings):
Value of Security (building) ................................................................. $ 68,000
20% of Remaining $10,000 .................................................................. 2,000
Total Collected by holders ............................................................. $ 70,000
Payment on Bonds Payable:
Value of Security (equipment) ............................................................ $ 35,000
20% of Remaining $80,000 .................................................................. 16,000
Total Collected by holders ............................................................. $ 51,000
Payment on Accounts Payable (unsecured):
20% of $70,000 ..................................................................................... $ 14,000
Payment of Salaries Payable:
Payment of Taxes Payable:
Payment of Administrative Expenses:
13-29
Education.
45. (20 Minutes) (Reporting of a reorganization and a liquidation)
a. Because the land's net realizable value is less than the amount of the secured
note payable, the debt will be reported on a statement of financial affairs as a
liability owed to "partially secured creditors." The $80,000 obligation is
disclosed in this manner and then reduced by the $48,000 anticipated cash
proceeds. The remaining $32,000 balance will be shown by Anteium as an
unsecured nonpriority liability.
The land is still reported as an asset, one pledged with partially secured
creditors. The $31,000 cost is revealed within the statement of financial affairs
although this information is not considered relevant in liquidation. The
$48,000 net realizable value is reported but is offset by the $80,000 liability.
Thus, no cash will be available to unsecured creditors unless a greater
amount is generated by the sale.
b. Fresh start accounting must be used because the reorganization value is less
than the debts and the original owners are left with less than 50 percent of the
voting stock.
After reorganization, the assets will be reported at $82,000 with one $5,000
debt. Since the common stock has a total par value of $40,000, additional
paid-in capital must be $37,000. Retained earnings will be zero.
— Land ........................................................................... 17,000

Investments ............................................................... 5,000
Goodwill...................................................................... 9,000
Additional Paid-In capital .................................... 31,000
To adjust asset values to fair market value (a
total of $73,000) with a Goodwill asset
established to bring the total up to $82,000
reorganization value.
— Note payable .............................................................. 80,000

Additional Paid-In Capital (60% of company total) 22,200
Gain on Discharge of Debt .................................. 57,800
To record issuance of stock to bank in settlement of
debt.
— Accounts Payable ..................................................... 20,000

Note Payable ........................................................ 5,000
To record settlement of accounts payable for 3-year note.
13-30
Education.
45. (continued)
— Gain on Discharge of Debt ....................................... 72,800

Additional Paid-In Capital ......................................... 16,200
To reduce additional paid-in capital balance to
correct figure, to close out gain account, and to
eliminate deficit as a step in establishing fresh
start accounting.
c. The bank will collect a total of $59,000. Obviously, the $50,000 proceeds
generated by the land sale must go to the bank with the remaining $30,000
obligation then being ranked as an unsecured-nonpriority liability. Anteium
(the insolvent company) will have $15,000 of the $26,000 cash left after paying
the $11,000 administrative expenses. Unsecured debts total $50,000 ($30,000
from the note and $20,000 of accounts payable). Thus, 30% of these debts will
be paid ($15,000/$50,000). The bank collects an additional $9,000 ($30,000 x
30%); the accounts payable collect $6,000 ($20,000 x 30%).
13-31
Education.
46. (25 Minutes) (Prepare statement of realization and liquidation)

a. LITZ CORPORATION
Statement of Realization and Liquidation
Stock-
Liabilities Fully Partially Unsecured holders'
Noncash with Secured Secured Nonpriority Equity
Cash Assets Priority Creditors Creditors Liabilities (Deficits)
Balances, 8/8/15 $ 16,000 $763,000 -0- $259,000 $132,000 $150,000 $238,000

Investments sold 39,000 (32,000) 7,000
Inventory sold 48,000 (69,000) (21,000)
Payment is made on note from
proceeds of auction (48,000) (48,000)
Remaining debt is reclassified (84,000) 84,000
Administrative expenses incurred $15,000 (15,000)
Land and buildings all sold 315,000 (370,000) (55,000)
Payment is made on note from
proceeds of sale (259,000) (259,000)
Reclassify liabilities with priority 34,000 (34,000)
Equipment sold 84,000 (210,000) (126,000)
Receivables collected 34,000 (82,000) (48,000)
Administrative expenses paid (15,000) (15,000)
Final balances remaining for
unsecured creditors $214,000 -0- $34,000 -0- -0- $200,000 $(20,000)
b. Total amount available to pay
liabilities with priority and
unsecured creditors (see part a) $214,000
Less: liabilities with priority (34,000)
Available for unsecured creditors $180,000
Percentage of claim to be received
by each unsecured creditor
($180,000/$200,000) 90%
13-32
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
47. (40 Minutes) (Prepare journal entries for company emerging from bankruptcy
Becket Corporation must use fresh start accounting because the

reorganization value of $650,000 is less than the company's allowed debts and
the original owners hold less than 50 percent of the voting stock after the
reorganization.

— Total assets = $637,000 (reorganization value of $650,000 plus proceeds from
sale of stock of $77,000 less $90,000 value of land and investments used to
settle two debts)
— Total liabilities = $350,000 ($130,000 + $40,000 + $180,000)
— Total common stock = $160,000 (10,000 additional shares are issued with a
$10 per share par value so that total outstanding shares = 16,000)
— Additional paid-in capital = $127,000 (figure needed to balance above
accounts after reorganization)
— Because the company has a reorganization value of $650,000 but the assets
have a fair value of only $623,000, Goodwill must be established for $27,000.
JOURNAL ENTRIES
—Investments ................................................................. 14,000
Land ............................................................................. 23,000
Buildings ..................................................................... 52,000
Goodwill ....................................................................... 27,000
Accounts Receivable ............................................ 20,000
Inventory ................................................................ 16,000
Equipment .............................................................. 31,000
Additional Paid-In Capital (to balance)................ 49,000
To adjust accounts to fair value as part of fresh
start accounting.
—Cash ........................................................................... 77,000

Common Stock ($10 par value) .......................... 70,000
To record shares sold to new investor.
—Cash ............................................................................. 40,000

Investments .......................................................... 40,000
Investments sold.
13-33
Education.
47. (continued)
—Notes Payable—Current ............................................. 220,000

Cash ......................................................................... 40,000
Notes Payable (due in 2019) .................................. 130,000
Gain on Discharge of Debt .................................... 50,000
To record settlement of current notes.
—Accounts Payable ....................................................... 129,000

To record settlement of accounts payable.
—Notes Payable (due in 2018) ...................................... 325,000

Land ......................................................................... 50,000
Common Stock ($10 par value) ............................. 30,000
(3/16 of total APIC requirement computed above) 23,813
To record settlement of long-term debt.
—Gain on Debt Discharge ............................................. 180,187

Additional Paid-In Capital ($127,000 – $79,813) . . 47,187
Retained Earnings (deficit) .................................... 133,000
accounting.
13-34
Education.
48. (40 Minutes) (Prepare statement of financial affairs and determine amounts to
be paid in liquidation)
a. OREGON CORPORATION
Available for
Book Unsecured
$33,000 Land (Plots A and D) $43,000
Less: Notes payable (30,000) $13,000
28,000 Land (Plots B and C) $25,000
Less: Notes payable (30,000) -0-
Free Assets:
6,000 Cash 6,000
25,000 Accounts receivable 12,000
Total available to pay liabilities with
priority and unsecured creditors $31,000
(listed below) 28,000
Available for unsecured creditors $ 3,000
Estimated deficiency 47,000
$92,000 $50,000
Unsecured—
Book Nonpriority
-0- Administrative expenses (estimated) $16,000
$12,000 Salaries payable 12,000
Total (as shown above) $28,000
30,000 Notes payable $30,000
Land (Plots A and D) (43,000) -0-
Land (Plots B and C) (25,000) $ 5,000
25,000 Notes payable 25,000
20,000 Accounts payable (less salaries
shown above) 20,000
(25,000)* Stockholders' equity
$92,000 $50,000
*Derived as a balancing figure.
13-35
Education.
48. (continued)
b. According to the statement of financial affairs prepared above, $3,000 cash

should be available for unsecured nonpriority creditors. Unfortunately,
$50,000 in unsecured nonpriority liabilities exist. Thus, only 6% of these
claims will be covered ($3,000/$50,000).
Cash of $11,240 will be paid on the note payable that is secured by plot B. The
land is to be sold for $11,000 leaving a $4,000 unsecured debt. Since 6% of
this amount is expected to be paid, the holder will only receive an additional
$240.
c. As indicated in part b, only 6% of the unsecured nonpriority claims can be

satisfied. Thus, just $1,500 will be paid on the unsecured $25,000 note
payable.
d. Selling plot D for $30,000 rather than $27,000 generates an additional $3,000
in available cash. The statement of financial affairs produced above would
then report $6,000 as the amount available for unsecured nonpriority claims
or 12% of the total ($6,000/$50,000). After plot B is sold for $11,000, the
remaining $4,000 of this note is classified as an unsecured nonpriority
liability. Since 12% of this amount is to be paid, an additional $480 is
transferred to the holder of the note for a total of $11,480.
13-36
Education.
49. (40 Minutes) (Prepare a statement of financial affairs)

LYNCH, INC.
March 14, 2015
Available for
Book Unsecured
$40,000 Land and building $75,000
Less: Notes payable (70,000) $5,000

14,000 Equipment $19,000
Less: Notes payable (150,000) -0-
Free Assets:
1,000 Cash 1,000
25,000 Accounts receivable 15,000
100,000 Inventory 33,000
15,000 Investments 21,000
Total available to pay liabilities with
priority and unsecured creditors $75,000
(listed below) (22,000)
Available for unsecured creditors $53,000
Estimated deficiency 115,000
$195,000 $168,000
13-37
Education.
49. (continued)
Unsecured—
Book Nonpriority
-0- Administrative expenses (estimated) $16,000
$5,000 Salaries payable 5,000
1,000 Payroll taxes payable 1,000
Total (above) $22,000
Land and building (75,000) -0-
Equipment (19,000) $ 131,000
33,000 Accounts payable 33,000
4,000 Advertising payable 4,000
(68,000) Stockholders' equity
$195,000 $168,000
13-38
Education.
'1'
50. (30 Minutes) (Prepare a statement of realization and liquidation)
a. LYNCH, INC.
Statement of Realization and Liquidation
March 14, 2015 to July 23, 2015
Stock-
Liabilities Fully Partially Unsecured holders'
Noncash with Secured Secured Nonpriority Equity
Cash Assets Priority Creditors Creditors Liabilities (Deficits
Book balances, 3/14/15

Answer from Problem 45 $ 1,000 $194,000 $6,000 $70,000 $150,000 $ 37,000 $(68,000)
Accounts receivable collected
—remaining balance assumed
to be uncollectible 18,000 (25,000) (7,000)
Inventory sold 40,000 (100,000) (60,000)
Accounts payable discovered 10,000 (10,000)
Land and buildings all sold 71,000 (40,000) 31,000
Fully secured note paid (70,000) (70,000)
Equipment sold 11,000 (14,000) (3,000)
Payment made on partially
secured debt (11,000) (11,000)
Investments sold 21,000 (15,000) 6,000
Administrative expenses accrued 20,000 (20,000)
Remaining partially secured
claims reclassified as
unsecured liabilities _______ (139,000) 139,000
Final balances remaining for
unsecured creditors $81,000 -0- $26,000 -0- -0- $186,000$(131,000)
b. The statement of realization and liquidation prepared in (a) indicates that $81,000 in cash remains. $26,000 of
this amount must be distributed to liabilities with priority leaving $55,000 for unsecured nonpriority creditors.
Since (as shown) these unsecured liabilities amount to $186,000, only 30% (rounded) ($55,000/$186,000) of
each debt will be paid. Thus, a creditor holding a $1,000 claim will receive cash of approximately $300.
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Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
51. (30 Minutes) (Prepare Journal entries for company emerging from bankruptcy
Holmes Corporation must use fresh start accounting because the

reorganization value of $225,000 is less than the company's allowed debts
and the original owners hold less than 50 percent of the voting stock after the
reorganization.

— Total assets = $248,200 ($225,000 reorganization value plus proceeds from
sale of stock of $36,000 less $12,800 payment made to settle unsecured
liabilities [20 percent of $64,000])
— Total liabilities = $118,000 ($18,000 + $70,000 + $30,000)
— Total common stock = $105,000 (11,000 additional shares are issued with a
$5 per share par value plus 10,000 existing shares so total outstanding
shares = 21,000)
— Additional paid-in capital = $25,200 (figure needed to balance above
accounts after reorganization)
JOURNAL ENTRIES
— Goodwill ..................................................................... 15,000
To adjust to total reorganization value as part of fresh
start accounting ($225,000 – $210,000).
— Salary Payable ........................................................... 18,000

Note Payable—1 year .......................................... 18,000
To record note issued for accrued salaries.
— Notes Payable ............................................................ 140,000

Note Payable—6 years ........................................ 30,000
Common Stock ($5 par value) ............................ 25,000
(5/21 of total required APIC computed above) 6,000
To record settlement of partially secured debt.
— Cash ............................................................................ 36,000

Common Stock ($5 par value) ............................ 30,000
To record shares sold to new investor.
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— Notes Payable ............................................................ 50,000

Accrued Expenses .................................................... 4,000
Cash ...................................................................... 12,800
To record payment of unsecured debts—20% payment
made.
— Gain on Debt Discharge ............................................ 130,200

Additional Paid-In Capital ($27,000 – $25,200) ....... 1,800
accounting.
Develop Your Skills
Research Case 1
This case allows the student to review the official information provided by the
Securities and Exchange Commission in connection with bankrupt
organizations, as well as gain information about reporting requirements for
organizations in bankruptcies. In addition, this assignment allows the student to
see how the SEC attempts to educate the public on matters pertaining to
financial investing.
This site includes a significant amount of general information including the

following:
 The differences between a Chapter 7 and a Chapter 11 bankruptcy.

 The risks incurred by the various parties.
 A description of a prepackaged bankruptcy plan.
 The advantages of filing under Chapter 11.
 The appointment of creditor committees.
 The development of a reorganization plan.
 Steps in a Chapter 11 reorganization, especially those that involve the
SEC.
 Conveyance of information about a bankruptcy.
 Voting on a reorganization plan.
 The effect on stockholders and bondholders.
 The steps of a Chapter 7 liquidation.
 Sources of additional information for a specific bankruptcy case.
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Education.
Research Case 2
This assignment provides the student with the chance to work with actual data
from a real company. Thus, students get a feel for the process of retrieving
information of interest about a company that is going through bankruptcy. In
addition, this assignment can help them appreciate the frustration that
sometimes comes about when analyzing financial statements. Textbooks often
have information laid out for students so that analysis may resemble a “connect
the dots” assignment. In reality, pages and pages of data are often available that
require slow and meticulous study.
Here is the actual note – parts (a) and (b) -- as supplied by the company. This
information can serve as the basis for considerable class discussion.
(a) Plan of Reorganization
On April 30, 2010 (the ‘‘Effective Date’’), the Bankruptcy Court entered an order
confirming the Debtors’ Modified Fourth Amended Joint Plan of Reorganization
(the ‘‘Plan’’) and the Debtors emerged from Chapter 11 by consummating their
restructuring through a series of transactions contemplated by the Plan
including the following:
• Name Change. On the Effective Date, but after the Plan became effective and
prior to the distribution of securities under the Plan, SFI changed its corporate
name to Six Flags Entertainment Corporation. As used herein, unless the context
requires otherwise, the terms ‘‘we,’’ ‘‘our,’’ and ‘‘Six Flags’’ refer collectively to
Six Flags Entertainment Corporation and its consolidated subsidiaries, and
‘‘Holdings’’ refers only to Six Flags Entertainment Corporation, without regard to
the respective subsidiaries. As used herein, ‘‘SFI’’ means Six Flags, Inc. as a
Debtor or prior to its name change to Six Flags Entertainment Corporation. As
used herein, the ‘‘Company’’ refers collectively to SFI or Holdings, as the case
may be, and its consolidating subsidiaries.
• Common Stock. Pursuant to the Plan, all of SFI’s common stock, preferred
stock purchase rights, preferred income equity redeemable shares (‘‘PIERS’’)
and any other ownership interest in SFI including all options, warrants or rights,
contractual or otherwise (including, but not limited to, stockholders agreements,
registration rights agreements and rights agreements) were cancelled as of the
Effective Date.
On the Effective Date, Holdings issued an aggregate of 54,777,778 shares of

common stock at $0.025 par value as follows: (i) 5,203,888 shares of common
stock to the holders of unsecured claims against SFI, (ii) 4,724,618 shares of
common stock to certain holders of the 121⁄4% Notes due 2016 (the ‘‘2016
Notes’’) in exchange for such 2016 Notes in the aggregate amount of $69.5
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million, (iii) 34,363,950 shares of common stock to certain ‘‘accredited investors’’

that held unsecured claims who participated in a $505.5 million rights offering,
(iv) 6,798,012 shares of common stock in an offering to certain purchasers for an
aggregate purchase price of $75.0 million, (v) 3,399,006 shares of common stock
in an offering to certain purchasers for an aggregate purchase price of $50.0
million and (vi) 288,304 shares of common stock were issued to certain other
equity purchasers as consideration for their commitment to purchase an
additional $25.0 million of common stock on or before June 1, 2011, following
approval by a majority of the members of Holdings’ Board of Directors (the
‘‘Delayed Draw Equity Purchase’’). On June 1, 2011, the Delayed Draw Equity
Purchase option expired. These share amounts have been retroactively adjusted
to reflect the June 2011 two-for-one stock split as described in Note 12.
On June 21, 2010, the common stock commenced trading on the New York Stock
Exchange under the symbol ‘‘SIX.’’
• Prepetition Indebtedness. Pursuant to the Plan and on the Effective Date, all
outstanding obligations under notes issued by SFI and SFO (collectively, the
‘‘Prepetition Notes’’) were cancelled and the indentures governing such
obligations were cancelled, except to the extent to allow the Debtors,
Reorganized Debtors (as such term is defined in the Plan) or the relevant
Prepetition Notes indenture trustee, as applicable, to make distributions
pursuant to the Plan on account of claims related to such Prepetition Notes. The
Prepetition Notes were as follows: (i) SFI’s 87⁄8% Senior Notes due 2010 (the
‘‘2010 Notes’’), (ii) SFI’s 93⁄4% Senior Notes due 2013 (the ‘‘2013 Notes’’), (iii)
SFI’s 95⁄8% Senior Notes due 2014 (the ‘‘2014 Notes’’), (iv) SFI’s 4.50%
Convertible Senior Notes due 2015 (the ‘‘2015 Notes’’), and (v) the 2016 Notes.
Pursuant to the Plan and on the Effective Date, the Second Amended and
Restated Credit Agreement, dated as of May 25, 2007 (as amended, modified or
otherwise supplemented from time to time, the ‘‘Prepetition Credit Agreement’’),
among SFI, SFO, SFTP (as the primary borrower), certain of SFTP’s foreign
subsidiaries party thereto, the lenders thereto, the agent banks party thereto and
JPMorgan Chase Bank, N.A., as Administrative Agent (in such capacity, the
‘‘Administrative Agent’’), was cancelled (except that the Prepetition Credit
Agreement continued in effect solely for the purposes of allowing creditors
under the Prepetition Credit Agreement to receive distributions under the Plan
and allowing the Administrative Agent to exercise certain rights).
• Financing at Emergence. On the Effective Date, we entered into two exit

financing facilities: (i) an $890.0 million senior secured first lien credit facility
comprised of a $120.0 million revolving loan facility, which could have been
increased up to $150.0 million in certain circumstances, and a $770.0 million term
loan facility (the ‘‘Exit First Lien Term Loan’’) and (ii) a $250.0 million senior
secured second lien term loan facility (the ‘‘Exit Second Lien Facility’’ and,
together with the Exit First Lien Facility, the ‘‘Exit Facilities’’). Also on the
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Education.
Effective Date, SFOG Acquisition A, Inc., SFOG Acquisition B, L.L.C., SFOT

Acquisition I, Inc. and SFOT Acquisition II, Inc. (collectively, the ‘‘TW
Borrowers’’) entered into a credit agreement with TW-SF, LLC comprised of a
$150.0 million multi-draw term loan facility (the ‘‘TW Loan’’) for use with respect
to the Partnership Parks ‘‘put’’ obligations.
See Note 8 for a discussion of the terms and conditions of these facilities and
subsequent amendments, early repayments, and terminations from debt
extinguishment transactions.
• Fresh Start Accounting. As required by accounting principles generally

accepted in the United States (‘‘GAAP’’), we adopted fresh start accounting
effective May 1, 2010 following the guidance of Financial Accounting Standards
Board (‘‘FASB’’) Accounting Standards Codification (‘‘ASC’’) Topic 852,
Reorganizations (‘‘FASB ASC 852’’). The financial statements for the periods
ended prior to April 30, 2010 do not include the effect of any changes in our
capital structure or changes in the fair value of assets and liabilities as a result
of fresh start accounting.
The implementation of the Plan and the application of fresh start accounting
results in financial statements that are not comparable to financial statements in
periods prior to emergence. See Note 1(b) for a detailed explanation of the
impact of emerging from Chapter 11 and applying fresh start accounting on our
financial position.
As used herein, ‘‘Successor’’ refers to the Company as of the Effective Date and
‘‘Predecessor’’ refers to SFI together with its consolidated subsidiaries prior to
the Effective Date.
(b) Fresh Start Accounting and the Effects of the Plan
Fresh start accounting results in a new basis of accounting and reflects the
allocation of the Company’s estimated fair value to its underlying assets and
liabilities. The Company’s estimates of fair value are inherently subject to
significant uncertainties and contingencies beyond the Company’s reasonable
control. Accordingly, there can be no assurance that the estimates, assumptions,
valuations, appraisals and financial projections will be realized, and actual
results could vary materially. The implementation of the Plan and the application
of fresh start accounting results in financial statements that are not comparable
to financial statements in periods prior to emergence.
Fresh start accounting provides, among other things, for a determination of the
value to be assigned to the equity of the emerging company as of a date selected
for financial reporting purposes, which for the Company is April 30, 2010, the
date that the Debtors emerged from Chapter 11. The Plan required the
contribution of equity from the creditors representing the unsecured senior
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Education.
noteholders of SFI, of which $555.5 million was raised at a price of $14.71 per
share, as adjusted to reflect the June 2011 two-for-one stock split described in
Note 12. Holdings also issued stock at $14.71 per share to pay $146.1 million of
SFO and SFI claims. The Company’s reorganization value reflected the fair value
of the new equity and the new debt, the conditions of which were determined
after extensive arms-length negotiations between the Debtors’ creditors, which
included the input of several independent valuation experts representing
different creditor interests, who used discounted cash flow, comparable
company and precedent transaction analyses. The analysis supporting the final
reorganization value was based upon expected future cash flows of the business
after emergence from Chapter 11, discounted at a rate of 11.5% and assuming a
perpetuity growth rate of 3.0%. The reorganization value and the equity value are
highly dependent on the achievement of the future financial results
contemplated in the projections that were set forth in the Plan. The estimates
and assumptions made in the valuation are inherently subject to significant
uncertainties. The primary assumptions for which there is a reasonable
possibility of the occurrence of a variation that would have significantly affected
the reorganization value include the assumptions regarding revenue growth,
operating expense growth rates, the amount and timing of capital expenditures
and the discount rate utilized.
The four-column consolidated statement of financial position as of April 30, 2010

(see below) reflects the implementation of the Plan. Reorganization adjustments
have been recorded within the condensed consolidated balance sheets as of
April 30, 2010 to reflect effects of the Plan, including discharge of liabilities
subject to compromise and the adoption of fresh start accounting in accordance
with FASB ASC 852. The reorganization value of the Company of approximately
$2.3 billion was based on the equity value of equity raised plus new
indebtedness and fair value of Partnership Parks ‘‘put’’obligations as follows (in
thousands):
Equity value based on equity raised(1) . . . . . . . . . . . . . . . . . . . . . . . . . $ 805,791

Add: Redeemable noncontrolling interests(2) . . . . . . . . . . . . . . . . . . 446,449
Add: Exit First Lien Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 770,000
Add: Exit Second Lien Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250,000
Add: Other debt(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,360
Add: Noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,219
Less: Net discounts on Exit Facilities . . . . . . . . . . . . . . . . . . . . . . . . (11,450)
Total emergence enterprise value . . . . . . . . . . . . . . . . . . . . . . . . . . $2,301,369
_______________________
(1) Equity balance is calculated based on 54,777,778 shares of Holdings common

stock at the price of $14.71 per share pursuant to the Plan, as adjusted to reflect
the June 2011 two-for-one stock split described in Note 12.
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(2) Redeemable noncontrolling interests are stated at fair value determined using
the discounted cash flow methodology. The valuation was performed based on
multiple scenarios with a certain number of ‘‘put’’ obligations assumed to be put
each year. The analysis used a 9.8% rate of return adjusted for annual inflation
for the annual guaranteed minimum distributions to the holders of the ‘‘put’’
rights and a discount rate of 7%.
(3) Other debt includes a $33.0 million refinance loan (the ‘‘Refinance Loan’’) for
HWP Development, LLC, $32.2 million of which was outstanding as of April 30,
2010, as well as capitalized leases of approximately $2.1 million and short-term
bank borrowings of $1.0 million. See Note 8 for a discussion of the terms and
conditions of the Refinance Loan.
_______________________
Under fresh start accounting, the total Company value is adjusted to

reorganization value and is allocated to our assets and liabilities based on their
respective fair values in conformity with the purchase method of accounting for
business combinations in FASB ASC Topic 805, Business Combination (‘‘FASB
ASC 805’’). The excess of reorganization value over the fair value of tangible and
identifiable intangible assets and liabilities is recorded as goodwill. Liabilities
existing as of the Effective Date, other than deferred taxes, were recorded at the
present value of amounts expected to be paid using appropriate risk adjusted
interest rates. Deferred taxes were determined in conformity with applicable
income tax accounting standards. Predecessor accumulated depreciation,
accumulated amortization, retained deficit, common stock and accumulated
other comprehensive loss were eliminated.
The valuations required to determine the fair value of the Company’s assets as
presented below represent the results of valuation procedures performed by
independent valuation specialists. The estimates of fair values of assets and
liabilities have been reflected in the Successor Company consolidated balance
sheet as of April 30, 2010.
The adjustments below are to our April 30, 2010 balance sheet. The balance
sheet reorganization adjustments presented below summarize the impact of the
Plan and the adoption of fresh start accounting as of the Effective Date.
SIX FLAGS ENTERTAINMENT CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET
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Education.
(in thousands)
April 30, 2010

Reorganization Fresh Start
Predecessor Adjustments(1) Adjustments(2) Successor

ASSETS
Current assets:
Cash and cash
equivalents . . . . . . . . . . . . .$ 75,836 $(21,326) $— $ 54,510
Accounts receivable . . . . . . . . 36,288 — 4,876 41,164
Inventories . . . . . . . . . . . . . . . . 37,811 — (193) 37,618
Prepaid expenses and
other current assets . . . 49,671 (9,750) (456) 39,465
Assets held for sale . . . . . . . . . . . 681 — — 681
Total current assets . . . . . . . 200,287 (31,076) 4,227 173,438
Other assets:
Debt issuance costs . . . . . . . . 11,817 28,184 — 40,001
Restricted-use
investment securities . . . . . . .2,753 — — 2,753
Deposits and other assets . . . 97,677 — 6,643 104,320
Total other assets . . . . . . . . . 112,247 28,184 6,643 147,074
Property and equipment,

at cost, net . . . . . 1,507,677 — (78,304) 1,429,373
Assets held for sale . . . . . . . . . 6,978 — — 6,978
Intangible assets, net of
accumulated
amortization(3) . . . . . . . . . . .10,164 — 412,591 422,755
Goodwill(4) . . . . . . . . . . . . .1,051,089 — (420,841) 630,248
Total assets . . . . . . . . . . . $2,888,442 $ (2,892) $ (75,684) $2,809,866
LIABILITIES and EQUITY (DEFICIT)

Liabilities not subject to compromise:
Current liabilities:
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Accounts payable . . . . . . . $ 92,198 $ (20,272) $ — $71,926

Accrued compensation,
payroll taxes and
benefits . . . . . . . . . . . . . . . 15,019 1,442 — 16,461
Accrued insurance reserves . 16,492 19,074 (5,118) 30,448
Accrued interest payable . . . .26,839 (26,630) — 209
Other accrued liabilities . . . . .52,753 2,883 1,438 57,074
Deferred income . . . . . . . . . . .61,033 — (1,324) 59,709
Liabilities from discontinued
operations . . 5,409 — — 5,409
Current portion of long-term
debt . . . . . . 352,623 (317,946) — 34,677
Total current liabilities not
subject to compromise . . .622,366 (341,449) (5,004) 275,913
Long-term debt . . . . . . . . . . .818,808 190,425 — 1,009,233
Other long-term liabilities . . . 46,868 — (9,383) 37,485
Deferred income taxes . . . . .118,821 — 110,955 229,776
Total liabilities not subject
to compromise . . . . . . . . 1,606,863 (151,024) 96,568 1,552,407
Liabilities subject to
compromise . . . . . . . . . . 1,745,175 (1,745,175) — —
Total liabilities . . . . . . . . . . 3,352,038 (1,896,199) 96,568
1,552,407
Redeemable noncontrolling
interests . . . . . . . . 355,933 — 90,516 446,449
Stockholders’ equity (deficit):

Preferred stock, $1.00 par
value . . . . . . . . — — — —
New common stock . . . . . . . . . . . — 685 — 685
Old common stock . . . . . . . . . 2,458 (2,458) — —
Capital in excess of
par value . . . . . . . . . 1,508,155 (703,049) — 805,106
Accumulated deficit . . . . .(2,308,699) 2,598,129 (289,430) —
Accumulated other
comprehensive loss . . . (26,535) — 26,535 —
Total stockholders’ (deficit)
equity . . . . (824,621) 1,893,307 (262,895) 805,791
Noncontrolling interests . . . . . 5,092 — 127 5,219
Total (deficit) equity . . . . . . .(819,529) 1,893,307 (262,768) 811,010
Total liabilities and
equity (deficit) . . . . $ 2,888,442 $ (2,892) $ (75,684) $2,809,866
_________________
(1) Represents amounts recorded on the Effective Date for the implementation of
the Plan, including the settlement of liabilities subject to compromise and related
payments, the incurrence of new indebtedness under the Exit Facilities and
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repayment of the Prepetition Credit Agreement and Prepetition Notes,

distributions of cash and Holdings common stock and the cancellation of SFI
common stock.
The Plan’s impact resulted in a net decrease of $21.3 million in cash and cash
equivalents. The significant sources and uses of cash were as follows (in
thousands):
Sources:
Net amount borrowed under the Exit First Lien Term Loan . . . . . . . . . $ 762,300
Net amount borrowed under the Exit Second Lien Loan Facility . . . . . . 246,250
Proceeds from the Equity Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . 630,500
Total sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,639,050
Uses:
Repayments of amounts owed:
Prepetition Credit Agreement—long term portion of term loan . . . . . 818,125
2016 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330,500
Prepetition Credit Agreement—revolving portion . . . . . . . . . . . . . . . . 270,269
Prepetition TW Promissory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,677
Prepetition interest rate hedging derivatives . . . . . . . . . . . . . . . . . . . 19,992
Prepetition Credit Agreement—current portion of term loan . . . . . . . 17,000
Payments:
Exit Facilities’ debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,700
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,950
Professional fees and other accrued liabilities . . . . . . . . . . . . . . . . . . 47,163
Total uses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,660,376
Net cash uses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (21,326)
The gain on the cancellation of liabilities subject to compromise, before income

taxes, was calculated as follows:
Extinguishment of the 2010 Notes, 2013 Notes, 2014 Notes and 2015
Notes (collectively, the ‘‘SFI Senior Notes’’) . . . . . . . . . . . . . . . . . . .$ 868,305
Extinguishment of the PIERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306,650
Write-off of the accrued interest on the SFI Senior Notes . . . . . . . . . . . 29,868
Write-off debt issuance costs on the Prepetition Credit Agreement
And the Prepetition TW Promissory Note . . . . . . . . . . . . . . . . . . . . . . .(11,516)
Issuance of Holdings’ common stock . . . . . . . . . . . . . . . . . . . . . . . . . . (105,791)
Gain on the cancellation of liabilities subject to
compromise, before income taxes . . . . . . . . . . . . . . . . . . . . . .$1,087,516
(2) Reflects the adjustments to assets and liabilities to estimated fair value, or
other measurements specified by FASB ASC 805, in conjunction with the
adoption of fresh start accounting. Significant adjustments are summarized as
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follows and all are considered a Level 3 fair value measurement with the
exception of the land values which are Level 2 fair value measurements.
• Deposits and other assets—note receivable—An adjustment of approximately

$7.4 million was recorded to the book value of a note receivable to its $8.4 million
estimated fair value, which was determined based on the discounted cash flow
method over the life of the note.
• Deposits and other assets—investment in nonconsolidated joint venture—This

account was adjusted to its estimated fair values based on customary valuation
methodologies, including comparable earnings multiples, discounted cash flows
and negotiated transaction values.
• Property and equipment, at cost—An adjustment of approximately $78.3 million

was recorded to adjust the net book value of property, plant and equipment to
fair value based on the new replacement cost less depreciation valuation
methodology. Key assumptions used in the valuation of the Company’s property,
plant and equipment were based on a combination of the cost or market
approach adjusted for economic obsolescence where appropriate. The land
value was obtained using a sales comparison approach.
• General liability and workers compensation—An adjustment of approximately

$5.1 million was recorded to adjust the value of the general liability and workers
compensation accruals for future receipts from deposits and payments for
claims discounted at a weighted average debt rate on emergence from Chapter
11 of 7%.
• Deferred revenue—An adjustment of approximately $1.3 million was recorded to

adjust the book value of deferred revenue attributable to season pass and other
advance ticket sales to the fair value using appropriate profit margins and cost
of service associated with related guest visitation.
• Pension—This adjustment primarily reflects differences in assumptions, such

as the expected return on plan assets and the weighted average discount rate
related to the payment of benefit obligations, between the prior measurement
date of March 31, 2010 and the Effective Date. For additional information on the
Company’s pension, see Note 14.
• Redeemable noncontrolling interests—These are stated at fair value determined

using the discounted cash flow methodology. The valuation was performed
based on multiple scenarios with certain number of ‘‘puts’’ assumed to be put
each year. The analysis used a 9.8% rate of return adjusted for annual inflation
for the annual guaranteed minimum distributions to the holders of the put rights
and a discount rate of 7%.
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The Predecessor Company recognized a loss of $178.5 million, before income

taxes, related to the fresh start accounting adjustments as follows (in
thousands):
Loss on fresh
start accounting
adjustments
Establishment of Holdings’ goodwill . . . . . . . . . . . . . . . . . . . . . . . . . $ 630,248
Elimination of SFI’s goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,051,089)
Establishment of Holdings’ intangible assets . . . . . . . . . . . . . . . . . . . 421,510
Elimination of SFI’s intangible assets . . . . . . . . . . . . . . . . . . . . . . . . (8,919)
Fair value adjustments:
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,389
Dick Clark Productions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,400
Deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,146)
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (78,304)
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,324
Accrued insurance reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,118
Redeemable noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . (90,516)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,490)
$ (178,475)
(3) The following represent the methodologies and significant assumptions used
in determining the fair value of the significant intangible assets, other than
goodwill and all are considered a Level 3 fair value measurement. Certain long-
lived intangible assets which include trade names, trademarks and licensing
agreements were valued using a relief from royalty methodology. Group-sales
customer relationships were valued using a multi-period excess earnings
method. Sponsorship agreements were valued using the lost profits method.
Certain intangible assets are subject to sensitive business factors of which only
a portion are within control of the Company’s management. A summary of the
key inputs used in the valuation of these assets are as follows:
• The Company valued trade names, trademarks and its third party licensing
rights using the income approach, specifically the relief from royalty method.
Under this method, the asset values were determined by estimating the
hypothetical royalties that would have to be paid if the trade name was not
owned or the third-party rights not currently licensed. Royalty rates were
selected based on consideration of several factors, including industry practices,
the existence of licensing agreements, and importance of the trademark, trade
name and licensed rights and profit levels, among other considerations. The
royalty rate of 4% of expected adjusted net sales related to the respective trade
names and trademarks was used in the determination of their fair values, and a
rate of 1.5% was used for the third-party license agreement. The expected net
sales were adjusted for certain international revenues, retail, licensing and
management fees, as well as certain direct costs related to the licensing
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agreement. The Company anticipates using the majority of the trade names and
trademarks for an indefinite period, while the license agreement intangible asset
will be amortized through 2020. Income taxes were estimated at a rate of 39.5%
and amounts were discounted using a 12% discount rate for trade names and
trademarks and 15% for the third-party license agreement. Trade name and
trademarks were valued at approximately $344 million and the third-party license
agreement at approximately $24 million.
• Sponsorship agreements were valued using the lost profits method, also
referred to as ‘‘with or without’’ method. Under this method, the fair value of the
sponsorship agreements was estimated by assessing the loss of economic
profits under a hypothetical condition where such agreements would not be in
place and would need to be recreated. The projected revenues, expenses and
cash flows were calculated under each scenario and the difference in the annual
cash flows was then discounted to the present value to derive at an indication of
the value of the sponsorship agreements. Income taxes were estimated at a rate
of 39.5% and amounts were discounted using a 12% discount rate, resulting in
approximately $43 million of value allocated to sponsorship agreements.
• The Company valued group sales customer relationships using the income
approach, specifically the multi-period excess earnings method. In determining
the fair value of the group-sales customer relationships, the multi-period excess
earnings approach values the intangible asset at the present value of the
incremental after-tax cash flows attributable only to the customer relationship
after deducting contributory asset charges. The incremental after-tax cash flows
attributable to the subject intangible asset are then discounted to their present
value. Only expected sales from current group sales customers were used which
was calculated based on a two year life. The Company assumed a retention rate
of 50% which was supported by historical retention rates. Income taxes were
estimated at a rate 39.5% and amounts were discounted using a 12% discount
rate. The group-sales customer relationships were valued at approximately $7
million under this approach.
(4) Fresh start accounting eliminated the balance of goodwill and other
unamortized intangible assets of the Predecessor Company and records
Successor Company intangible assets, including reorganization value in excess
of amounts allocated to identified tangible and intangible assets, also referred to
as Successor Company goodwill. The Successor Company’s April 30, 2010
consolidated balance sheet reflects the allocation of the business enterprise
value to assets and liabilities immediately following emergence as follows (in
thousands):
Enterprise value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,301,369
Add: Fair value of non-interest bearing liabilities
(non-debt liabilities) 508,497
Less: Fair value of tangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .(1,756,863)
Less: Fair value of identified intangible assets . . . . . . . . . . . . . . . . . . . (422,755)
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Reorganization value of assets in excess of amounts allocated to

identified tangible and intangible assets (Successor Company
goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 630,248
Analysis Case 1
Students may look up any one of a number of companies that have emerged
recently from bankruptcy reorganization. The type of results that will be found
will be based on the specific company. One company, for example, that has
emerged from reorganization is Constar International. Here is a press release
obtained at www.constar.net:
Philadelphia, PA - June 1, 2009 -- Constar International Inc., a leading
global producer of PET (polyethylene terephthalate) plastic containers for
food and beverages, announced that the Company and its affiliated
debtors completed their financial restructuring and successfully emerged
from Chapter 11 on Friday, May 29, 2009. The reorganization was
completed approximately five months from the filing of their Chapter 11
petitions on December 30, 2008. In conjunction with its emergence from
Chapter 11, Constar also announced that it had converted its debtor-in-
possession financing into an exit facility to provide the Company with
ongoing liquidity.
Michael Hoffman, President and Chief Executive Officer of Constar,
commented, "On behalf of our Board and the management team, I want to
thank our unsecured bond holders for their support and their willingness
to restructure our debt. At the same time I want to express my appreciation
to our loyal customers, committed suppliers and dedicated employees
who have supported us and encouraged us throughout the process. We
emerge a revitalized company with an improved balance sheet. Combining
our improved financial condition with our strong technologies, we are
better positioned than ever to provide our customers with the product
quality, innovation and service they have come to expect from Constar."
As required by the Plan approved by the Bankruptcy Court, Constar's old
common stock (which has recently traded with the symbol CNSTQ) was
cancelled in connection with the emergence from Chapter 11. Holders of
the old common stock will not receive a distribution of any kind and no
further transfers will be recorded on the Company's books.
In accordance with the Plan, holders of the $175 million of Constar's pre-
Petition Subordinated Notes will convert 100% of their face amount into
new common stock of the reorganized Company. This common stock is
initially expected to trade over-the-counter. The Company estimates that
following the distribution of the new shares, there will be approximately
1.75 million shares of the new common stock outstanding (exclusive of
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approximately 195,000 additional shares reserved for issuance under

equity incentive plans).
Cautionary Note Regarding Forward-Looking Statements
Except for historical information, all information in this news release
consists of forward-looking statements within the meaning of the federal
securities laws, including statements regarding the intent, belief or current
expectations of the Company and its management which are made with
words such as "will," "expect," "believe," and similar words. These
forward-looking statements involve a number of risks, uncertainties and
other factors, which may cause the actual results to be materially different
from those expressed or implied in the forward-looking statements.
Important factors that could cause the actual results of operations or
financial condition of the company to differ from expectations are
identified from time to time in the Company's reports filed with the SEC,
including the risk factors identified in its Annual Report on Form 10-K for
the year ended December 31, 2008, and in subsequent filings made prior
to, on or after today. The Company does not intend to review, revise, or
update any particular forward-looking statements in light of future events.
A second source of information is the Securities and Exchange Commission.

According to the SEC website, using an EDGAR search, Constar International
filed a Form 8-K on the same date as the above press release that made public
the following:
Item 1.01 Entry into a Material Definitive Agreement.

On May 29, 2009 (the “Effective Date”), Constar International Inc. (the
“Company”), together with certain of its affiliates (each, a “Debtor” and
collectively, the “Debtors”) consummated the transactions contemplated
by the Debtors’ Second Amended Joint Plan of Reorganization, as Further
Modified, Pursuant to Chapter 11 of the Bankruptcy Code, as confirmed by
the United States Bankruptcy Court for the District of Delaware (the
“Bankruptcy Court”) on May 14, 2009 (as confirmed, the “Plan”).
In connection with the consummation of the Plan, on the Effective Date,
the Company’s existing Senior Secured Super-Priority Debtor in
Possession and Exit Credit Agreement, dated as of December 31, 2008 (the
“Credit Agreement”) was converted into exit financing in accordance with
its terms. For a description of the Credit Agreement, reference is made to
the description of such agreement in the Company’s Current Report on
Form 8-K filed with the Securities and Exchange Commission (the
“Commission”) on January 6, 2009, which description is incorporated by
reference herein. Also in connection with the consummation of the Plan,
the Company and its lenders entered into Amendment No. 2 to the Credit
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Agreement, primarily for the purposes of updating certain schedules to the

Credit Agreement and permitting the Company’s Dutch subsidiary,
Constar International Holland (Plastics) B.V., which is neither a party to nor
a guarantor of the Credit Agreement, to enter into separate financing
arrangements. The foregoing is not a complete description of Amendment
No. 2 to the Credit Agreement, which is filed as Exhibit 99.1 to this Report
and the terms of which are incorporated herein by reference.
Item 1.02 Termination of a Material Definitive Agreement.

In connection with the Company’s reorganization and emergence from
bankruptcy, all existing shares of the Company’s capital stock were
canceled pursuant to the Plan. In addition, in the same connection, all of
the Company’s Senior Subordinated 11% Notes Due 2012 were canceled
and the related indenture was terminated (except for purposes of allowing
the noteholders to receive distributions under the Plan). The holders of the
Class 4 Senior Subordinated Note Claims (as defined in the Plan) received
10 shares of new Common Stock per $1,000 face amount of the Senior
Subordinated Notes pursuant to the Plan.
In addition, upon the Effective Date, the following incentive plans were
terminated (and any and all awards granted under such plans were
terminated and will no longer be of any force or effect): (1) the 2007 Non-
Employee Directors’ Equity Incentive Plan; (2) the 2007 Stock-Based
Incentive Compensation Plan; (3) Constar International Inc. Non-Employee
Directors’ Equity Incentive Plan; (4) Constar International Inc. 2002 Stock-
Based Incentive Compensation Plan; (5) the Amended and Restated
Constar International Inc. Supplemental Executive Retirement Plan; and
(6) the Amended and Restated Constar International Inc. Annual Incentive
and Management Stock Purchase Plan. The 2007 Incentive Plan was
replaced by the Constar International Inc. Annual Incentive Plan, adopted
May 26, 2009 (the “AIP”). For a description of the AIP, please see the
Company’s Current Report on Form 8-K filed with the Commission on
June 1, 2009.
Finally, a search of on-line journals finds a number of articles discussing the

bankruptcy reorganization of Constar International including:
“Moody's Lowers PDR of Constar to D; CFR to Ca,” Moody's Investors

Service Press Release, December 30, 2008.
“Bottle Maker Constar Files for Bankruptcy,” Plastics News, January 5,
2009.
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Education.
“Constar International Inc. Receives Delisting Notice from NASDAQ Stock

Market,” Business Wire, January 6, 2009.
“Court Confirms Constar’s Plan of Reorganization,” Business Wire, May 4,
2009.
“Constar International Inc - CNSTQ: Completes Restructuring and
Emerges from Chapter 11 Bankruptcy,” Market News Publishing, June 1,
2009.
“Constar International Inc. Completed Its Financial Restructuring and
Emerged From Chapter 11,” Business Wire, June 1, 2009.
There are obviously many ways available to investors who are trying to get
information about a bankruptcy reorganization plan.
Analysis Case 2
While a company is going through bankruptcy reorganization, creditors,

investors, employees, and other interested parties all want to know the current
status of the process. This assignment was designed simply to help students
determine what information can be readily gained from a company’s website
about a reorganization that is in process. Different companies will undoubtedly
provide widely differing amounts of information.
The following (along with a string of periodic press releases) was posted on the
Web site of Borders (www.borders.com).
Borders Group Files for Reorganization Relief Under Chapter 11
Secures Commitment for $505 Million in Debtor-in-Possession Financing
Borders to Continue to Conduct Business in Ordinary Course
Chapter 11 Provides Borders with Best Route to Reorganize and Reposition

Company for the Long-Term
Ann Arbor, Mich. Feb. 16, 2011 —“It has become increasingly clear that in light of
the environment of curtailed customer spending, our ongoing discussions with
publishers and other vendor related parties, and the company’s lack of liquidity,
Borders Group does not have the capital resources it needs to be a viable
competitor and which are essential for it to move forward with its business
strategy to reposition itself successfully for the long term. To position Borders to
remedy this condition, Borders Group, with the authorization of its board of
directors, has filed a petition for reorganization relief under Chapter 11 of the
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Bankruptcy Code. This decisive action will give Borders the opportunity to
achieve a proper infusion of capital in order to have the opportunity to have the
time to reorganize in order to reposition itself to be a successful business for the
long term,” said Mike Edwards, Borders Group President.
“In this regard, operating under Chapter 11, Borders has received commitments
for $505 million in Debtor-in-Possession (DIP) financing led by GE Capital,
Restructuring Finance. This financing should enable Borders to meet its
obligations going forward so that our stores continue to be competitive for
customers in terms of goods, services and the shopping experience. It also
affords Borders the opportunity to move forward in implementing the appropriate
business strategy designed to reposition Borders to be a potentially vibrant,
national retailer of books and other products,” Mr. Edwards emphasized.
The company said that it is serving customers in the normal course, including
honoring its Borders Rewards program, gift cards and other customer programs.
Additionally, the company expects to make employee payroll and continue its
benefits programs for its employees.
Borders said that it has many strengths upon which to build a solid plan of
reorganization and implement a new business model for Borders to address the
changing needs of the American reader. “For decades, Borders has been a
beacon of engagement — a highly frequented destination for consumers and a
significant venue for authors and vendors to showcase new books and
merchandise. We have the ability, based on our brick and mortar presence
nationally; the on-line capabilities we have in place; the loyalty of, and access to,
our customers; and the products and services we offer to be an important and
easy access destination of exploration and purchase for readers across the
country,” commented Mr. Edwards.
The company noted that, among other initiatives and subject to court approval,
Borders plans to undertake a strategic Store Reduction Program to facilitate
reorganization and its repositioning. Borders has identified certain
underperforming stores — equivalent to approximately 30 percent of the
company’s national store network — that are expected to close in the next
several weeks. At the same time, the company noted that a major strength of
Borders is its national presence, and its extensive network of remaining stores
as well as Borders.com, will continue to run in normal course. The company
emphasized that the closings were a reflection of economic conditions, cost
structures and viability of locations, among other factors, and not on the
dedication and productivity of the workforce in these stores.
“We are confident that, with the protection afforded under Chapter 11 and with
the support of employees, publishers, suppliers and creditors, and the reading
public, a successful reorganization can be achieved enabling Borders to emerge
from the process as a stronger and more vibrant book seller,” concluded Mr.
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Education.
Edwards.
"We are very pleased to be able to make this commitment to Borders as support
for their plan to reorganize the company," said Tim Tobin, Managing Director,
Retail Restructuring, GE Capital, Restructuring Finance.
The Chapter 11 petition for relief was filed in the U.S. Bankruptcy Court,
Southern District of New York. Completion of the company’s DIP financing
arrangements is subject to approval of the Bankruptcy Court and the satisfaction
of certain conditions provided in the financing commitments received by the
company from the lenders providing such financing.
Communications Case 1
A study of almost any large bankrupt organization can lead to a considerable

degree of speculation as to the reasons for the company’s decline. For example,
the following articles provide a few examples of the discussions surrounding the
struggles of Borders Group. Because the company was widely known, its
bankruptcy has been closely followed by the press.
“Today’s Corporate Restructuring Requires a NEW Approach,” Financial

Executive, April 2011.
“For Borders, a Scramble to Be Lean.” Wall Street Journal, March 14 2011.
“Bookseller Borders Begins a New Chapter . . . 11.” Wall Street Journal, February
17, 2011.
“When One of the Giants Falls.” New York Times, February 17 2011.
“Borders bankruptcy: 200 store closings point to the rise of e-books,” The
Christian Science Monitor, February 16, 2011.
“Borders Bankruptcy to Ripple Through Industry,” Publishers Weekly, February

21, 2011.
“Borders Bankruptcy Shines Light on Continued Weakness of Power Centers,”

Penton Insight, February 16, 2011.
“Borders ' bankruptcy filing result of failing to keep up with shoppers' book,
music, DVD habits,” Associated Press Newswires, February 16, 2011.
COMMUNICATIONS CASE 2
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Education.
This assignment is designed so that the student can work with several practical
accounting journals such as the CPA Journal and the Journal of Accountancy.
These sources provide a considerable amount of information about the nature of
the work that can be performed for a company before, during, and after
bankruptcy.
13-59
Education.

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Chapter 13 - Accounting for Legal Reorganizations and Liquidations

IV. A Statement of Financial Affairs is frequently produced by an insolvent company to

A. A trustee is appointed to oversee termination of business affairs, liquidation of noncash

Answers to Discussion Questions

How Much Is That Building Really Worth?

Is this the Real Purpose of the Bankruptcy Laws?

1. "Insolvent" refers to a state of financial position whereby a company (or individual) is

3. Bankruptcy cases have two overriding objectives:

— Claims for administrative expenses,

at risk of being reduced. Thus, if a balance sheet is produced while a company is in

27. Professional fees incurred during reorganization must be expensed as incurred.

26. (10 Minutes) (Distribution of cash in a business liquidation)

Liabilities with Priority:

Free Assets after Payment of Liabilities with Priority

Percentage of Unsecured Liabilities to Be Paid: $111,000/$185,000 = 60 %

Payment on Notes Payable:

27. (5 Minutes) (Distribution of assets as a result of liquidation)

Liabilities with Priority

Paid first—administrative expense................................ $3,450

No payments will be made by Xavier in connection with the remainder of (a)

28. (8 Minutes) (Distribution of assets to partially secured creditors)

Liabilities with Priority ................................................... $ 42,000

Free Assets after Payment of Liabilities with Priority

Percentage of Unsecured Liabilities to Be Paid: $84,000/$280,000 = 30%

Payment on Partially Secured Debt:

29. (8 Minutes) (Distribution of assets to partially secured creditors)

Liabilities with Priority.................................................... 22,800

Free Assets after Payment of Liabilities with Priority.. $57,200

Percentage of Unsecured Liabilities to be Paid: $57,200/$220,000 = 26%

30. (12 Minutes) (Liquidation of assets to satisfy debt)

31. (8 Minutes) (Payments to be made on unsecured and partially secured

a. The unpledged assets of $310,000 must be added to any excess to be

Amount Available ........................................................... $370,000

Accounts Payable ........................................................... $400,000

Distribution to Unsecured Creditors: $187,200/$520,000 = 36%

An unsecured creditor to whom $13,000 is owed can expect to receive $4,680

32. (20 Minutes) (Distribution of cash assets resulting from liquidation)

Payment on Note Payable A:

33. (15 Minutes) (Liquidation of assets to satisfy debt)

Free Assets (except for equipment):

Less: Liabilities with Priority:

In order for unsecured creditors to receive 50 percent of their claims, $232,000

34. (15 Minutes) (Payment of various liabilities as a result of liquidation)

Less: Liabilities with priority

Percentage of unsecured liabilities to be paid: $84,000/$210,000 = 40%

Amounts to be paid for:

35. (2 Minutes) (Reporting of debts during liquidation)

Because of the uncertainty about the amount that will be paid on an

36. (9 Minutes) (Adjusting a company’s records to fresh start accounting as it

Receivables ($90,000 - $80,000) .................................... 10,000

Revenues ........................................................................ $ 467,000

39. (15 Minutes) (Prepare a balance sheet for a company in bankruptcy

Land, buildings, and equipment:

Liabilities not subject to compromise

Liabilities subject to compromise

BOOK VALUES AFTER EMERGING FROM REORGANIZATION

— Common Stock .......................................................... 144,000

— Accounts Payable ..................................................... 80,000

— Accrued Expenses ................................................... 35,000

— Note Payable ............................................................. 200,000