intercompany sales and foreign exchange transactions

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Chapter 5:Intercompany Profit Transactions Inventories Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall5-1

to accompanyAdvanced Accounting, 11th editionby Beams, Anthony, Bettinghaus, and Smith

1

Intercompany Profits Inventories: ObjectivesUnderstand the impact of intercompany profit in inventories on preparing consolidation workpapers.Apply the concepts of upstream versus downstream inventory transfers.Defer unrealized inventory profits remaining in the ending inventory. Recognize realized, previously deferred, inventory profits in the beginning inventory.

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall5-2

Objectives (cont.)Adjust the calculations of noncontrolling interest amounts in the presence of intercompany inventory profits.Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall5-3

1: Intercompany Inventory ProfitsIntercompany Profit Transactions InventoriesCopyright 2012 Pearson Education, Inc. Publishing as Prentice Hall5-4

Intercompany TransactionsFor consolidated financial statementsintercompany balances and transactions shall be eliminated. [FASB ASC 810-10-45-1]Show income and financial position as if the intercompany transactions had never taken place.Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall5-5

Intercompany Sales of InventoryProfits on intercompany sales of inventoryRecognized if goods have been resold to outsidersDeferred if the goods are still held in inventoryPreviously deferred profits in beginning inventory are recognized in the period the goods are sold. Assuming FIFOBeginning inventories are soldEnding inventories are from current purchasesCopyright 2012 Pearson Education, Inc. Publishing as Prentice Hall5-6

No Intercompany Profits in InventoriesDuring 2011, Pet sold goods costing $1,000 to its subsidiary, Sim, at a gross profit of 30%. Sim had none of this inventory on hand at the end of 2011. The worksheet entry for 2011:

All intercompany sales of inventories have been resold to outside parties, so remove the full sales price from both sales and cost of sales. Pet's sales are reduced $1,429.Sim's cost of sales are reduced $1,429.The same entry is used if Sim sells to Pet.Sales (-R, -SE)1,429 Cost of sales (-E, +SE)1,429Eliminate intercompany sales = $1,000 / (1-30%) = $1,429


Intercompany Profits Only in Ending InventoriesLast year, 2011, Pal sold goods costing $500 to its subsidiary, Sal, at a gross profit of 25%. Sal had none of this inventory on hand at the end of 2011.During 2012, Pal sold additional goods costing $900 to Sal at a gross profit of 40%. Sal has $200 of these goods on hand at 12/31/2012. Worksheet entries for 2012:Sales (-R, -SE) 1,500 Cost of sales (-E, +SE)1,500Eliminate intercompany sales = $900 / (1-40%) = $1,500Cost of sales (E, -SE)80 Inventory (-A)80Defer profit in ending inventory = $200 x 40%


Intercompany Profits Beginning and Ending InventoriesLast year, 2011, Pam sold goods costing $300 to its subsidiary, Sir, at mark-up of 25%. Sir had $120 of this inventory on hand at the end of 2011.During 2012, Pam sold additional goods costing $500 to Sir at a 30% mark-up. Sir has $260 of these goods on hand at 12/31/2012. Worksheet entries for 2012:Sales (-R, -SE)650 Cost of sales (-E, +SE)650Eliminate intercompany sales = $500 + 30%($500) = $650Cost of sales (E, -SE)60 Inventory (-A)60Defer profits in ending inventory = $260 x 30%/130%Investment in Subsidiary (+A)24Cost of sales (-E, +SE) 24Realize profits from beginning inventory = $120 x 25%/125% = $24


2: Upstream & Downstream Inventory SalesIntercompany Profit Transactions InventoriesCopyright 2012 Pearson Education, Inc. Publishing as Prentice Hall5-10

Downstream Sales

Parent sells to subsidiarySubsidiary sells to parent

Upstream SalesUpstream and Downstream Sales


Intercompany Inventory SalesThe worksheet entries for eliminating intercompany profits for downstream sales

For upstream sales, the last entry would include a debit to noncontrolling interest, sharing the realized profit between controlling and noncontrolling interests.Sales (-R, -SE)XXX Cost of sales (-E, +SE)XXXFor the intercompany sales priceCost of sales (E, -SE)XX Inventory (-A)XXFor the profits in ending inventoryInvestment in Subsidiary (+A)XXCost of sales (-E, +SE) XXFor the profits in beginning inventory


Data for ExampleFor the year ended 12/31/2011:Subsidiary income is $5,200 Subsidiary dividends are $3,000Current amortization of acquisition price is $450Intercompany (IC) sales information:IC sales during 2011 were $650IC profit in ending inventory $60IC profit in beginning inventory $24


CI 80% share$3,800 (60)24 $3,764 $2,400

NCI 20% share$950 $600

Income Sharing with Downstream Sales PARENT Makes SaleSubsidiary net income$5,200 Current amortizations(450)Adjusted income$4,750 Defer profits in EI(60)Recognize profits in BI24 Income recognized$4,714 Subsidiary dividends$3,000

When parent makes the IC sale, the impact of deferring and recognizing profits falls all to the parent.Income from subsidiary


NCI 20% share$950.0(12.0)4.8$942.8

$600

CI 80% share$3,800 (48)19.2 $3,771.2 $2,400

Income Sharing with Upstream Sales SUBSIDIARY Makes SaleSubsidiary net income$5,200 Current amortizations(450)Adjusted income$4,750 Defer profits in EI(60)Recognize profits in BI24 Income recognized$4,714 Subsidiary dividends$3,000

When subsidiary makes the IC sale, the impact of deferring and recognizing profits is split among controlling and noncontrolling interests.Income from subsidiary


3: Unrealized Profits in Ending InventoriesIntercompany Profit Transactions InventoriesCopyright 2012 Pearson Education, Inc. Publishing as Prentice Hall5-16

Ending Inventory on HandIntercompany profits in ending inventoryEliminate at year endWorking paper entry

Cost of sales (E, -SE)XXX Inventories (-A)XXXFor the unrealized profit


Parent AccountingPot owns 90% of Sot acquired at book value (no amortizations). During the current year, Sot reported $10,000 income. Pot sold goods to Sot during the year for $15,000 including a profit of $6,250. Sot still holds 40% of these goods at the end of the year.Unrealized profit in ending inventory40%(6,250) = $2,500Pot's Income from Sot90%(10,000) 2,500 unrealized profits = $6,500Noncontrolling interest share10%(10,000) = $1,000Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall5-18

EntriesPot's journal entry to record income

Worksheet entries to eliminate intercompany sale and unrealized profitsSales (-R, -SE)15,000 Cost of goods sold (-E, +SE)15,000Cost of goods sold (E, -SE)2,500 Inventory (-A)2,500

Investment in Sot (+A)6,500 Income from Sot (R, +SE)6,500


Worksheet Income StatementPotSotDRCRConsolSales$100.0 $50.0 15.0 $135.0 Income from Sot6.5 6.5 0.0 Cost of sales(60.0)(35.0)2.5 15.0 (82.5)Expenses(15.0)(5.0)(20.0)Noncontrolling interest share1.0 (1.0)Controlling interest share$31.5 $7.5 $31.5

There would be a credit adjustment to Inventory for $2.5 on the balance sheet portion of the worksheet. Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall5-20

What if?If the sales had been upstream, by Sot to Pot:Unrealized profits in ending inventory40%(6,250) = $2,500Pot's Income from Sot90%(10,000 2,500) = $6,750Noncontrolling interest share10%(10,000 2,500) = $750

Upstream profits impact both:Controlling interest shareNoncontrolling interest shareCopyright 2012 Pearson Education, Inc. Publishing as Prentice Hall5-21

4: Recognizing Profits from Beginning InventoriesIntercompany Profit Transactions InventoriesCopyright 2012 Pearson Education, Inc. Publishing as Prentice Hall5-22

Intercompany Profits in Beginning InventoryUnrealized profits in ending inventory one year

Become

Profits to be recognized in the beginning inventory of the next year!


5: Impact on Noncontrolling InterestIntercompany Profit Transactions InventoriesCopyright 2012 Pearson Education, Inc. Publishing as Prentice Hall5-24

Direction of Sale and NCIThe impact of unrealized profits in ending inventory and realizing profits in beginning inventory depends on the direction of the intercompany salesDownstream salesFull impact on parentUpstream salesShare impact between parent and noncontrolling interestCopyright 2012 Pearson Education, Inc. Publishing as Prentice Hall5-25

Calculating Income and NCIDownstream sales:Income from sub = CI%(Sub's NI) Profits in EI + Profits in BINoncontrolling interest share = NCI%(Sub's NI)Upstream sales:Income from sub = CI%(Sub's NI Profits in EI + Profits in BI)Noncontrolling interest share = NCI%(Sub's NI Profits in EI + Profits in BI)Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall5-26

Upstream Example with AmortizationPerry acquired 70% of Salt on 1/1/2011 for $420 when Salt's equity consisted of $200 capital stock and $200 retained earnings. Salt's inventory was understated by $50 and building, with a 20-year life, was understated by $100. Any excess is goodwill.

During 2011, Salt sold goods for $700 to Perry at a 20% markup. $240 of these goods were in Perry's ending inventory.In 2012, Salt sold goods for $900 to Perry at a 25% markup and Perry still had $100 on hand at the end of the year.20112012PerrySaltPerrySaltSeparate income$1,250 $705$1,500 $745Dividends$600 $280 $600 $300


Analysis and AmortizationCost of 70% of Salt$420 Implied value of Salt 420/.70$600 Book value 200 + 200400Excess$200

UnamortAmortUnamortAmortUnamortAllocated to:1/1/1120111/1/12201212/31/12Inventory50 (50)0 0 0 Building100 (5)95 (5)90 Goodwill50 0 50 0 50 200 (55)145 (5)140


NCI 30% share$195 ($12)$183 $84

CI 70% share$455 ($28)$427 $196

2011 Income Sharing (Upstream)

Income from Salt

Salt's net income$705 Current amortizations(55)Adjusted income$650 Defer profits in EI(40)Income recognized$610

Subsidiary dividends$280


Perry's 2011 Equity EntriesInvestment in Salt (+A)420 Cash (-A)420For acquisition of 70% of SaltCash (+A)196Investment in Salt (-A)196For dividends receivedInvestment in Salt (+A)427Income from Salt (R, +SE)427For share of income


2011 Worksheet Entries (1 of 3)1. Adjust for errors & omissions - none2. Eliminate intercompany profits and losses

3. Eliminate income & dividends from sub. and bring Investment account to its beginning balance

Sales (-R, -SE)700 Cost of sales (-E, +SE)700Cost of Sales (E, -SE)40Inventory (-A)40

Income from Salt (-R, -SE)427 Dividends (+SE)196Investment in Salt (-A)231


2011 Entries (2 of 3)4. Record noncontrolling interest in sub's earnings & dividends

5. Eliminate reciprocal Investment & sub's equity balancesCapital stock (-SE)200 Retained earnings (-SE)200Inventory (+A)50Building (+A)100Goodwill (+A)50Investment in Salt (-A)420Noncontrolling interest (+SE)180

Noncontrolling interest share (-SE)183 Dividends (+SE)84Noncontrolling interest (+SE)99


2011 Entries (3 of 3)6. Amortize fair value/book value differentials

7. Eliminate other reciprocal balances none Cost of sales (E, -SE)50 Inventory (-A)50Depreciation expense (E, -SE)5Building (-A)5


NCI 30% share$222 ($6)$12 $228 $90

CI 70% share$518 ($14)$28 $532$210

2012 Income Sharing (Upstream)

Income from Salt

Salt's net income$745 Current amortizations(5)Adjusted income$740 Defer profits in EI(20)Realize profits from BI40 Income recognized$760 Subsidiary dividends$300


Perry's 2012 Equity EntriesCash (+A)210Investment in Salt (-A)210For dividends receivedInvestment in Salt (+A)532Income from Salt (R, +SE)532For share of income


2012 Worksheet Entries (1 of 3)1. Adjust for errors & omissions - none2. Eliminate intercompany profits and losses

3. Eliminate income & dividends from sub. and bring Investment account to its beginning balance

Income from Salt (-R, -SE)532 Dividends (+SE)210Investment in Salt (-A)322

Sales (-R, -SE)900 Cost of sales (-E, +SE)900Cost of Sales (E, -SE)20Inventory (-A)20Investment in Salt (+A)28Noncontrolling interest (-SE)12Cost of sales (-E, +SE)40


2012 Entries (2 of 3)4. Record noncontrolling interest in sub's earnings & dividends

5. Eliminate reciprocal Investment & sub's equity balancesCapital stock (-SE)200 Retained earnings (-SE)625Inventory (+A)0Building (+A)95Goodwill (+A)50Investment in Salt (-A)679Noncontrolling interest (+SE)291

Noncontrolling interest share (-SE)228 Dividends (+SE)90Noncontrolling interest (+SE)138


2012 Entries (3 of 3)6. Amortize fair value/book value differentials

7. Eliminate other reciprocal balances none Depreciation expense (E, -SE)5Building (-A)5



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!All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

Pearson Education, Inc. publishing as Prentice Hall6-40Chapter 6: Intercompany Profit Transactions Plant Assetsby Jeanne M. David, Ph.D., Univ. of Detroit Mercy

to accompanyAdvanced Accounting, 10th editionby Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn

Beams, Advanced Accounting 10e, Ch. 103/5/2015Pearson Education Inc., publishing as Prentice Hall40

40

Pearson Education, Inc. publishing as Prentice Hall6-41Intercompany Profits Plant Assets: ObjectivesAssess the impact of intercompany profit on transfers of plant assets in preparing consolidations working papers.Defer unrealized profits on asset transfers by either the parent or subsidiary.Recognize realized, previously deferred profits on asset transfers by the parent or subsidiary.Adjust the calculation of noncontrolling interest amounts in the presence of intercompany profits on asset transfers.

Pearson Education, Inc. publishing as Prentice Hall6-421: Transfers of Plant AssetsIntercompany Profit Transactions Plant Assets

Pearson Education, Inc. publishing as Prentice Hall6-43Intercompany Fixed Asset SalesIntercompany sales of nondepreciable fixed assets:In year of intercompany saleDefer any gain or lossRestate fixed asset to costIn years of continued ownershipAdjust investment account to defer gain or loss (adjust noncontrolling interest too, if upstream sale)Restate fixed asset to costIn year of sale to outside entityAdjust investment account (and noncontrolling interest if upstream sale)Recognize the previously deferred gain or loss

Pearson Education, Inc. publishing as Prentice Hall6-44Intercompany Sale of LandPark owns 90% of Stan, acquired at cost equal to fair value. In 2009, Park sells (downstream) land to Stan and records a $10 gain. In 2013, Stan sells the land to an outside entity at a $15 gain. Stan's separate income was $70 in 2009, $80 per year for 2010 to 2012, and $90 in 2013.

Pearson Education, Inc. publishing as Prentice Hall6-452009 CalculationsDefer the unrealized gain, with full effect to ParkPark's Income from Stan90%(70) 10 = $53Noncontrolling interest share10%(70) = $7Elimination entry for 2009 WorksheetGain on sale of land10 Land10

Pearson Education, Inc. publishing as Prentice Hall6-462010 to 2012 CalculationsContinue to defer gain, with full effect to ParkPark's Income from Stan90%(80) = $72Noncontrolling interest share10%(80) = $8Elimination entry for Worksheets in 2010 to 2012Investment in Stan10 Land10

Pearson Education, Inc. publishing as Prentice Hall6-472013 CalculationsRecognize the previously deferred gain, with full effect to ParkPark's Income from Stan90%(90) + 10 = $91Noncontrolling interest share10%(90) = $9Elimination entry for 2013 WorksheetInvestment in Stan10 Gain on sale of land10

Pearson Education, Inc. publishing as Prentice Hall6-482: Deferring Unrealized ProfitsIntercompany Profit Transactions Plant Assets

Pearson Education, Inc. publishing as Prentice Hall6-49Unrealized Profits on Fixed AssetsUnrealized profit or loss on nondepreciable fixed assetsDefer in year of intercompany saleContinue deferring by adjusting the investment in subsidiary (and noncontrolling interest if upstream)Recognize full profit or loss upon resale to outside entity

Pearson Education, Inc. publishing as Prentice Hall6-50Depreciable Fixed AssetsGains and losses on intercompany sales of depreciable fixed assetsDefer in period of intercompany saleRecognize gain or loss over remaining life of asset Adjust asset and depreciation down for gainsAdjust asset and depreciation up for lossesRecognize any unamortized gain or loss upon sale to outside entity

Pearson Education, Inc. publishing as Prentice Hall6-51Downstream ExamplePerry owns 80% of Soper, acquired at cost equal to fair value. On 1/1/09, Perry sells equipment to Soper at a $30 profit. The equipment has a remaining life of 5 years from 1/1/09. Soper disposes of the equipment at book value at the end of 5 years. Soper's income is $70 in 2009, $80 per year for 2010 to 2012, and $90 in 2013.

Pearson Education, Inc. publishing as Prentice Hall6-522009 CalculationsDefer the unrealized gain and amortize it over 5 years with full effect to Perry30 gain / 5 years = $6Perry's Income from Soper80%(70) 30 + 6 = $32Noncontrolling interest share20%(70) = $14Elimination entry for 2009 WorksheetGain on sale of equipment30 Equipment30Accumulated depreciation6Depreciation expense6

Pearson Education, Inc. publishing as Prentice Hall6-533: Recognizing Realized, Previously Deferred ProfitsIntercompany Profit Transactions Plant Assets

Pearson Education, Inc. publishing as Prentice Hall6-54Previously Deferred Gains/LossesRecognize over the life of the depreciable assetDownstream salesAdjust investment in subsidiary accountUpstream salesAdjust investment in subsidiary account and noncontrolling interest, proportionatelyIntercompany sales at a gainAdjust asset and depreciation downIntercompany sales at a lossAdjust asset and depreciation up

Pearson Education, Inc. publishing as Prentice Hall6-552010 to 2012 CalculationsContinue to recognize part of the gain, with full effect to PerryPerry's Income from Soper80%(80) + 6 = $70Noncontrolling interest share20%(80) = $16Elimination entry for Worksheets in 2010Investment in Soper24 Accumulated depreciation6Equipment30Accumulated depreciation6Depreciation expense6

Pearson Education, Inc. publishing as Prentice Hall6-56Entries (cont.)Worksheet entries for 2011

Worksheet entries for 2012Investment in Soper18 Accumulated depreciation12Equipment30Accumulated depreciation6Depreciation expense6

Investment in Soper12 Accumulated depreciation18Equipment30Accumulated depreciation6Depreciation expense6

Pearson Education, Inc. publishing as Prentice Hall6-572013 CalculationsRecognize the remaining deferred gain, with full effect to PerryPerry's Income from Soper80%(90) + 6 = $78Noncontrolling interest share20%(90) = $18Elimination entries for 2013 WorksheetInvestment in Soper6 Accumulated depreciation24Equipment30Accumulated depreciation6Depreciation expense6

Pearson Education, Inc. publishing as Prentice Hall6-584: Impact on Noncontrolling InterestIntercompany Profit Transactions Plant Assets

Pearson Education, Inc. publishing as Prentice Hall6-59Sharing Unrealized Gain or LossUpstream sales of fixed assets require:Deferring the gain or loss on the saleRecognizing a portion of the gain or loss as the asset depreciatesWriting off any unrecognized gain or loss upon the sale of the assetSharing the gains and losses between the controlling and noncontrolling interestsUpstream sales impact noncontrolling interests!

Pearson Education, Inc. publishing as Prentice Hall6-60Upstream ExamplePail owns 70% of Shovel, acquired at cost equal to fair value. On 1/1/09, Shovel sells equipment to Pail at a $40 profit. The equipment has a remaining life of 5 years from 1/1/09. Pail Uses the equipment for four years, then sells it at a profit at the start of 2013. Shovel's income is $70 in 2009, $80 per year for 2010 to 2012, and $90 in 2013.

Pearson Education, Inc. publishing as Prentice Hall6-612009 CalculationsDefer the unrealized gain and amortize it over 5 years sharing the gain40 gain / 5 years = $8Pail's Income from Shovel70%(70 40 + 8) = $26.6Noncontrolling interest share30%(70 40 + 8) = $11.4Elimination entry for 2009 WorksheetGain on sale of equipment40 Equipment40Accumulated depreciation8Depreciation expense8

Pearson Education, Inc. publishing as Prentice Hall6-622010 to 2012 CalculationsContinue to recognize part of the gain, sharing its effect between the controlling and noncontrolling interestsPail's Income from Shovel70%(80 + 8) = $61.6Noncontrolling interest share30%(80 + 8) = $26.4

Pearson Education, Inc. publishing as Prentice Hall6-632010 Worksheet EntriesElimination entry for Worksheets in 2010

Investment in Shovel22.4 Noncontrolling interest9.6Accumulated depreciation8.0Equipment40.0Accumulated depreciation8.0Depreciation expense8.0

Pearson Education, Inc. publishing as Prentice Hall6-642011 Worksheet EntriesWorksheet entries for 2011

Investment in Shovel16.8 Noncontrolling interests7.2Accumulated depreciation16.0Equipment40Accumulated depreciation8.0Depreciation expense8.0

Pearson Education, Inc. publishing as Prentice Hall6-652012 Worksheet EntriesWorksheet entries for 2012Investment in Shovel11.2 Noncontrolling interest4.8Accumulated depreciation24.0Equipment40.0Accumulated depreciation8.0Depreciation expense8.0

Pearson Education, Inc. publishing as Prentice Hall6-662013 CalculationsRecognize the remaining deferred gain, sharing the impact with controlling and noncontrolling interestsUnamortized gain = 1 year at $8Pail's Income from Shovel70%(90 + 8) = $68.6Noncontrolling interest share30%(90 + 8) = $29.4Elimination entries for 2013 WorksheetInvestment in Shovel5.6 Noncontrolling interests2.4Accumulated depreciation32.0Equipment40.0Accumulated depreciation8.0Gain on sale of equipment8.0

Pearson Education, Inc. publishing as Prentice Hall6-67Sale at Other Than Fair ValueIntercompany sales of fixed assets at prices other than fair valueDeserve scrutiny by shareholdersSales above fair value move additional cash to the sellerSales below fair value transfer valuable goods to the buyerThere is a transfer of wealth between the affiliated companies, and between the controlling and noncontrolling interests

Pearson Education, Inc. publishing as Prentice Hall6-68Inventory Items Fixed AssetsAn intercompany sale of inventory which is acquired as a fixed assetUnrealized profit is removed from cost of sales in year of saleProfit is recognized over the fixed asset's lifeCost of salesXXX EquipmentXXXAccumulated depreciationXDepreciation expenseX

Pearson Education, Inc. publishing as Prentice Hall6-69Copyright 2009 Pearson Education, Inc. Publishing as Prentice HallAll rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

Chapter 18Corporate Liquidations and ReorganizationsCopyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-70

to accompanyAdvanced Accounting, 11th editionby Beams, Anthony, Bettinghaus, and Smith

70

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-71Corporate Liquidations and Reorganizations: ObjectivesUnderstand differences among types of bankruptcy filing.Comprehend trustee responsibilities and accounting during liquidation.Understand financial reporting during reorganization.Understand financial reporting after emerging from reorganization, including fresh-start accounting.

1: types of bankruptciesCorporate Liquidations and ReorganizationsCopyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-72

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-73InsolvencyEquity insolvencyInability to pay debts on timeMay avoid bankruptcy proceedingsNegotiate directly with creditors

Bankruptcy insolvencyHaving total debts in excess of the fair value of assetsMay be liquidated, orReorganized

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-74Types of BankruptciesChapter 7: LiquidationTrustee appointed to sell assets of business

Chapter 9: Adjustment of Debt of a Municipality

Chapter 11: ReorganizationDebtor is expected to be rehabilitated

Chapter 12: Farmers

Chapter 13: Adjustment of Debts of an Individual

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-75CharacteristicsVoluntary bankruptcy proceedingsFiled by debtorInvoluntary bankruptcy proceedingsFiled by creditor or group of creditors

Court actionDismiss a caseAccept the petitionChange form

Chapter 11 reorganization Chapter 7 liquidation

2: trustee responsibilities and accountingCopyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-76Corporate Liquidations and Reorganizations

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-77Duties of Debtor CorporationIn both liquidation and reorganization cases, the debtor corporation mustFile a list of creditors, a schedule of assets and liabilities, and a statement of financial affairsCooperate with trusteeSurrender property to the trustee, including recordsAppear at court hearings

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-78Duties of TrusteeTrustee serves in liquidation casesInvestigate debtor's financial affairsProvide information Examine, perhaps object to, creditor claimsFile report on trusteeshipIf authorized to operate debtor's business, other period reports are required

In reorganization cases, in addition to aboveFiling reorganization plan or statement why one cannot be filed


Ranking of Claims: Liquidation

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-80Statement of AffairsLegal document prepared for bankruptcy courtAssets at expected net realizable valuesClassified on basis of availability for classes of creditorsLiabilities are classifiedPriority, fully secured, partially secured, unsecuredHistorical values included for reference



Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-83Trustee AccountingAt start of case, trustee creates a new set of books.During the case, Records transactionsStatement of cash receipts and disbursementsStatement of changes in estate equityBalance sheetStatement of realization and liquidationAt close of case,Final settlement of claimsTrustee is dismissed

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-84Debtor in PossessionUnless there is a reason to appoint a trustee, the debtor corporations management is permitted to continue to run the company while in bankruptcy.

The Debtor in Possession has the same responsibilities as a trustee in a reorganization case.

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-85Creditors CommitteeThe Creditors Committee is elected in a liquidation case, and is appointed in a reorganization case from the largest unsecured creditors.Makes decisions on behalf of all creditorsReviews ongoing transactions of the debtor in possession and can objectHandles negotiations with any creditor regarding settlement or continued business.

Benefits of Chapter 11Benefits of being the Debtor in Possession include:Rejecting executory contracts Cancelling unexpired leasesLegal protection from creditor action, such as lawsuits or repossession of property

However, day-to-day operations may become more difficult as lenders, suppliers, customers, and employees are aware of the bankruptcy filing.Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-86

Reorganization PlanA plan may be filed at the time of the bankruptcy filing (prepackaged bankruptcy) or by the debtor corporation within 120 days of filing. Other interested parties may file proposed plans after 120 days.Identify classes of claimsSpecify the expected payout of each classClaims within a given class must be treated alikeDefine the expected requirements for execution of the planMust be fair and equitableCopyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-87

3: financial reporting during REORGANIZATIONCopyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-88Corporate Liquidations and Reorganizations

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-89Chapter 11: Balance SheetPrepetition liabilities subject to compromise are reported as a separate line item in liabilitiesArose before filingInclude unsecured and under-secured liabilitiesLikely to be paid at an amount less than face value

Prepetition secured liabilities and post petition liabilities reported in normal fashion

Prepetition claims discovered after filing Included at court-allowed amounts

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-90Chapter 11: Other StatementsReorganization costs shown separately

Interest to be paid or probable amountDifferences from contractual amounts should be noted

Expected stock or stock equivalent issuances should be disclosed

Cash flow items related to reorganization shown separately

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-91Combined Financial StatementsCondensed combined financial statements are prepared for all entities in reorganization proceedings as supplementary informationIntercompany receivables and payablesWrite-down if necessary

4: emerging from reorganizationCopyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-92Corporate Liquidations and Reorganizations

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-93Reorganization ValueApproximates fair value of entity without considering liabilitiesDiscounted future cash flows of reorganized businessConsider business and financial riskReorganization value determines how much creditors recoverEmerging business will either useFresh start reportingReport liabilities at present value and forgiveness of debt as extraordinary item

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-94Fresh-Start ReportingFresh-Start Reporting recognizes that the emerging company is a new entity.

To qualify,Revaluation value immediately before the reorganization plan is confirmed must be less than post-petition liabilities and allowed claims, andHolders of existing voting shares receive less than 50% of emerging entity

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-95Apply Fresh Start ReportingAllocated reorganization value to identifiable assetsUnallocated amount is an intangible called Reorganization value in excess of amounts allocated to identifiable assets

Liabilities at current value at confirmation dateDeferred tax benefits are first applied to reduce any intangible asset recorded

Prepare final reports of old entityThe effects of adjustments to asset and liability accounts are shown, so that ending balance sheet of old entity = beginning balance sheet of new entity

Continued Reporting of Old CompanyIf a company does not qualify for Fresh-Start Reporting, then

Report liabilities at the appropriate interest rate under GAAPReport debt forgiveness as an extraordinary itemCopyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-96

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-97Reorganization ExampleTig files for protection under Chapter 11 on January 5, 2011. Accordingly, itreclassifies prepetition liabilitiesobtains short-term financingacquires additional equipmentcontinues operations through June 30, 2012 when the plan is approved, with a reorganization value of $2,200

First, we'll look at the statements pre and post reorganization. Then we'll go through the entries and adjustments that occurred.

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-98Balance Sheet AssetsFiled 1/5/11FYE 12/31/11Before6/30/12Re-valuationFair value 6/30/12AFTER 6/30/12Cash50 150 300 0 300 300 Accounts receivable500 350 335 0 335 335 Inventory300 370 350 25 375 375 Other current assets50 50 30 0 30 30 Land200 200 200 100 300 300 Building, net500 450 425 (75) 350 350 Equipment, net300 330 290 (30) 260 260 Patent200 150 125 (125) 0 0 Reorganization value in excess of identifiable assets250 2,100 2,050 2,055 (105)1,9502,200

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-99Changes to AssetsFair values and revaluation amounts are shown on 6/30/12 for comparison.Tig continues operations, records depreciation, and even acquires equipment from filing on 1/5/11 to reorganization on 6/30/12.

The reorganization revalues the assets to their fair value on that date. Patents are completely written off.

Tig records an intangible "Reorganization value in excess of identifiable assets" of $250. Not all reorganizations result in this intangible.

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-100Filed 1/5/11FYE 12/31/11Before 6/30/12AFTER 6/30/12Short-term borrowing (post)150 75 75 Accounts payable (pre/post)600 100 125 125 Wages payable (post)50 55 55 Taxes payable (pre)150 150 Accrued bond interest (pre)90 Note payable (pre)260 Subordinated debt (post)395 12% bonds payable current (post)100 12% bonds payable (post)500 15% bonds payable (pre)1,200 Liabilities subject to compromise2,300 2,300 Capital stock (old)500 500 500 Capital stock (new)800 Deficit(700)(1,050)(1,000)0 2,100 2,050 2,055 2,200

Balance Sheet - Liability & Equity

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-101Changes to LiabilitiesUpon filing on 1/5/11, Tig reclassifies the unsecured and partially secured liabilities at that point as Pre-petition Liabilities Subject to Compromise.

Pre-petition Liabilities Subject to Compromise are then reclassified or settled according to the plan.

Accounts payable on 12/31/11 does not include any of the $600 due prior to filing.

Taxes payable are still to be paid, and eventually recorded again in full.

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-102Changes to EquitySome of the creditors receive stock in the reorganized firm. The old shareholders also receive stock, but now own only $100 of $800 of the stock at book value.

Although some APIC was recorded in reorganizing, it was subsequently eliminated. If it had been sufficient to wipe out the deficit, no intangible "reorganization value in excess of identifiable assets" would be recorded.

The Deficit is removed!

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-103Can Tig Use Fresh Start?On 6/30/12 there were $255 in post-petition liabilities. All $2,300 pre-petition liabilities were allowed by the courts. Firm value is $2,200.1. Liabilities exceed reorganization value2. Old shareholders retain less than 50%

Yes, fresh start is appropriate.Post-petition liabilities$255 Allowed claims2,300 Total liabilities$2,555 Less reorganization value(2,200)Excess liabilities$355

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-104Reorganization Plan: 6/30/12Pre-petition Liabilities and EquityNew AgreementsDebt Dis-charge15% partially secured bonds, $1200

$500 new stock, $500 senior 12% bonds, and another $100 bonds due 12/31/12$100Priority tax claims $150To be paid cash once confirmed$0Remaining unsecured claims, $950:$600 accounts payable$275 subordinated debt and $140 new stock$185$90 accrued interestForgiven$90$260 note$120 subordinated debt and $60 new stock$80Total debt discharged$455Old stock$100 new stockEquity

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-105Record New Debt AgreementsThis entry reclassifies the pre-petition debt according to the reorganization plan.Liabilities subject to compromise (pre)2,300 Taxes payable150 12% senior debt500 12% senior debt - current 100 Subordinated debt395 Common stock (new)700 Gain on debt discharge455 settlement of prepetition claims

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-106Give Shareholders New SharesThey will lose control since creditors have $700 of common stock. Common stock (old)500 Common stock (new)100 Additional paid in capital400 exchange of stock with owners

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-107Revalue AssetsA loss is recorded in revaluing the assets. Refer back to the Asset side of the balance sheet.Inventory25 Land100 Loss on asset revaluation105 Buildings, net75 Equipment, net30 Patent125 revalue assets to fair value

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-108Calculate Balance in Retained Earnings (Deficit)If sufficient APIC had existed, there would be no intangible asset, and excess APIC would remain on the balance sheet.Deficit, 6/30/12(1,000)Gain on debt discharge455 Loss on asset revaluation(105)Final measure of deficit, 6/30/12($650)Write-off Additional paid in capital400 Reorganization value in excess of identifiable assets (intangible asset)($250)

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-109Eliminate Deficit in EquityThe $1,000 deficit on 6/30/12 is adjusted for the gain on debt discharge and loss on asset revaluation. The net $650 deficit eliminates all of the APIC and creates a $250 intangible.Reorganization value in excess of identifiable assets250 Gain on debt discharge455 Additional paid in capital400 Loss on asset revaluation105 Deficit 1,000

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-110Simplifying Assumptions

All transactions are recorded on 6/30/12.Generally this takes some time.Creditors may have interest between submission and approval of plan. All pre-petition debt is approved.The $2,200 reorganization value of the firm probably used a discounted cash flow firm valuation model.

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall18-111DisclosuresAdjustments to historical valuesAssetsLiabilities

Debt forgiveness

Prior retained earnings or deficit eliminated

Significant factors in determining the reorganization value


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Corporate Liquidationsand ReorganizationsChapter 17

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 113

Learning Objective 1Understand differences amongtypes of bankruptcy filings.

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Bankruptcy Reform Act of 1978Prior to 1898, state government legislationgoverned bankruptcy procedures.The 1898 Bankruptcy Act, a federal law,preempted the state legislation.The 1898 Act was repealed when Congressenacted the Bankruptcy Reform Act of 1978.

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Bankruptcy LawThe bankruptcy law facilitates debt relief toindividuals and corporations under variousprovisions, called chapters.

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Types of BankruptciesChapter 7 LiquidationA trustee is appointed to sell offassets of the individual or companyand pay claims to creditors.DescriptionTypeChapter 9 Adjustmentsof debts of amunicipalityMunicipalities (not covered here).


Types of BankruptciesChapter 11 ReorganizationA debtor corporation is expected to berehabilitated and the reorganization ofthe corporation is anticipated.Either a trustee is appointed or thecompany performs the duties of atrustee (debtor in possession).A plan of reorganization is negotiated.DescriptionType


Types of BankruptciesDescriptionChapter 12 FarmersFamily farmers with regular income(not covered here).TypeChapter 13 Adjustmentsof debts of anindividual withregular incomeExclusively applies to individuals,including sole proprietorships.Unsecured debts less than $250,000and secured debts less than $750,000(not covered here).


Payment of Claims I.Secured ClaimsClaims secured by valid liens.II.Unsecured Priority Claims1.Administrative expenses incurred in preserving andliquidating the estate.2.Claims incurred between the date of filing and thedate an interim trustee is appointed.3.Claims for wages, salaries, and commissions.4.Claims for contributions to employee benefit plans.5.Claims of individuals regarding property or services.6.Claims of governmental units (taxes, duties, etc.).

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Payment of ClaimsIII.Unsecured Nonpriority Claims1.Allowed claims that were timely filed.2.Allowed claims where proof of claims was filed late.3.Allowed claims for any fine, penalty, or forfeiture, orfor charges arising prior to the order for relief.4.Claims for interest on the unsecured priority claimsor the unsecured nonpriority claims.IV.Stockholders ClaimsRemaining assets are returned to the debtor corporationor its stockholders.

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 2Comprehend trusteeresponsibilities and accountingduring liquidation.

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Duties of the Trusteein Liquidation CasesThe filing of a case creates an estate.The trustee takes possession of the estate,converts the assets into cash, and distributesthe proceeds according to the priority ofclaims, as directed by the bankruptcy court.

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Statement of AffairsThis statement is a legaldocument prepared for thebankruptcy court.It emphasizes liquidation value.

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Trustee AccountingThe Bankruptcy Actdoes not coverprocedural accountingdetails.

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Trustee AccountingStatement of Cash Receipts and DisbursementsStatement of Changes in Estate EquityBalance SheetStatement of Realization and Liquidation

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 3Understand financial reportingduring reorganization.

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn ReorganizationLess than 30% of business bankruptcy casesare filed under Chapter 11 each year.A Chapter 11 reorganization case isinitiated voluntarily or involuntarily.

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Trustee or Debtor in PossessionA private trustee may be appointed.The debtor corporation may continue in possession.

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn The Duties of a TrusteeIncluding the Following: Being accountable for the debtors property Filing a list of creditors, schedules of assets and liabilities, and a financial statement Furnishing information to the court Examining creditor claims for authenticity Filing a reorganization plan Filing final papers on the trusteeship

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Committee RepresentationCreditors committees are responsiblefor protecting the interests of thecreditors they represent.

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Operating Under Chapter 11Protection of the debtorin possession allowingpossible cost reductionsLosing the confidenceof its lenders, suppliers,customers, and employersPossible BenefitsDisadvantages

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn The Plan of Reorganization Must: Identify class of claims Specify any class of claims that is not impaired Specify any class of claims that is impaired Treat all claims within a particular class alike Provide adequate means for the plans execution Prohibit the issuance of nonvoting securities Prohibit the issuance of nonvoting securities

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Financial Reporting DuringReorganizationThe reorganization processcan take several years.The corporation must still preparefinancial statements and filingsfor the SEC during this timeperiod and after it emergesfrom reorganization.

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Effects of Chapter 11 on theBalance SheetUnsecured liabilities and undersecuredliabilities incurred before the companyentered Chapter 11 are prepetitionliabilities subject to compromise.

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Effects of Chapter 11 on theIncome StatementProfessional fees and similar expensesrelated directly to the Chapter 11proceedings are expensed as incurred.Reorganization items should be reported.

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Effects of Chapter 11 on theStatement of Cash FlowsCash flow items relating to reorganizationare disclosed separately from cash flowitems relating to the ongoingoperations of the business.

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Supplementary CombinedFinancial StatementsSOP 90-7 requires that condensed combinedfinancial statements for all entities inreorganization proceedings be presentedas supplementary financial information.

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 4Understand financial reportingafter emerging fromreorganization includingfresh-start accounting.

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Financial Reporting forthe Emerging CompanyOrdinarily, a corporate reorganizationinvolves a restructuring of liabilities andcapital accounts and a revaluation of assets.For many companies, their reorganizationplan includes the sale of the company.

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Reorganization ValueGenerally, the reorganization value isdetermined by discounting future cashflows for the reconstituted businessplus the expected proceeds from sale ofassets not required in the new business.

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Fresh-Start ReportingFresh-start reporting results ina new reporting entity with noretained earnings or deficit balance.The SOP provides two conditions thatmust be met for fresh-start reporting:

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Fresh-Start Reporting1.The reorganization value of the emergingentitys assets immediately before the date ofconfirmation of the reorganization plan is less than the total of all postpetition liabilitiesand allowed claims.2.Holders of existing voting shares immediatelybefore confirmation of the reorganization planreceive less than 50% of the emerging entity.

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Fresh-Start Reporting Resultsin a New Reporting Entity Allocating the reorganization valueto identifiable assets Reporting liabilities Final statement of old entity Disclosures in initial financialstatements of new entity Comparative financial statements

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Reporting by Entities That Do NotQualify for Fresh-Start ReportingLiabilities are reported at present valuesusing appropriate interest rates.Forgiveness of debt should be reportedas an extraordinary item.Quasi-reorganization accounting is not used.

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Illustration of a Reorganization CaseTiger Corporation files for protection fromcreditors under Chapter 11 on January 5, 2003.During 2003, no prepetition liabilities arepaid and no interest is accrued on thebank note or the bonds payable.

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Illustration of a Reorganization CaseThe bankruptcy court allows Tiger to invest$100,000 in new equipment in August 2003.The new equipment has a useful life offive years, and is depreciated over a fiveyear period to the nearest half-year.

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Illustration of a Reorganization CaseBuilding depreciation:$50,000 per yearOld equipment:$60,000 per yearPatent amortization:$50,000 per year

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Illustration of a Reorganization Case(Tiger Balance Sheet)Current assetsCash$ 50,000Accounts receivable, net 500,000Inventory 300,000Other current assets 50,000$ 900,000Plant assetsLand$200,000Building, net 500,000Equipment, net 300,000Patent 200,000 1,200,000$2,100,000

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Illustration of a Reorganization Case(Tiger Balance Sheet)Current liabilitiesAccounts payable$600,000Taxes payable 150,000Accrued interest on bonds 90,000Note payable to bank 260,000$1,100,00015% bonds payable(partially secured) 1,200,000Stockholders deficitCapital stock 500,000Deficit700,000 200,000$2,100,000

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Reclassification of LiabilitiesSubject to Compromise(000)Accounts Payable 600Taxes Payable 150Accrued Interest on 15% Bonds 90Note Payable to Bank 26015% Bonds Payable (partially secured)1,200Liabilities Subject to Compromise2,300To reclassify liabilities subject to compromise

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Income and Retained EarningsStatement for the Year 2003Sales$ 1,000,000Cost of sales (430,000)Wages and salaries (250,000)Depreciation and amortization (170,000)Other expenses (50,000)Earnings before reorganization items 100,000Professional fees related to bankruptcy (450,000Net loss (350,000) Beginning deficit (700,000)Deficit December 31, 2003$(1,050,000)

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Tiger Balance Sheetat December 31, 2003Current assetsCash$150,000Accounts receivable, net 350,000Inventory 370,000Other current assets 50,000$ 920,000Plant assetsLand$200,000Building, net 450,000Equipment, net 330,000Patent 150,000 1,130,000$2,050,000

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Tiger Balance Sheetat December 31, 2003Current liabilitiesShort-term borrowings$ 150,000Accounts payable 100,000Wages and salaries payable 50,000$ 300,000Liabilities subject tocompromise 2,300,000Stockholders deficitCapital stock 500,000Deficit1,050,000 550,000$2,050,000

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn The Reorganization Plan1.Tigers 15% bonds payable were secured with the land and building. The bondholders agree to accept$500,000 new common stock, $500,000 senior debtof 12% bonds and $100,000 cash payable 12/31/03.2.The priority tax claims of $150,000 will be paid incash as soon as the reorganization plan is confirmed.3.The remaining unsecured, nonpriority, prepetitionclaims of $950,000 will be settled as follows:

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn The Reorganization Plana. Creditors represented by the accounts payablewill receive $275,000 subordinated debt and$140,000 common stock.b. The $90,000 accrued interest on the 15% bondswill be forgiven.c.The $260,000 note payable to the bank will beexchanged for $120,000 subordinated debtand $60,000 common stock.4.Equity holders will exchange their stock for $100,000common stock of the emerging company.

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Fresh-Start ReportingThe reorganization value is compared with the totalpostpetition liabilities and court-allowed claims at June 30to determine if fresh-start reporting is appropriate.Postpetition liabilities$ 255,000Allowed claims subject to compromise 2,300,000Total liabilities on June 30, 2004 2,555,000Less: Reorganization value2,200,000Excess liabilities over reorganization value$ 355,000

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Proposed ReorganizedCapital StructurePostpetition liabilities$ 255,000Taxes payable 150,000Current portion of senior debt,due December 2004 100,000Senior debt, 12% bonds 500,000Subordinated debt 395,000Common stock 800,000$2,200,000

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Comparative Balance Sheetsat June 30, 2004 (000)AssetsCashAccounts receivableInventoryOther current assetsLandBuildingEquipmentPatentReorganization excess

$ 300 335 350 30 200 425 290 125 $2,055

a 25

b 100

f 250

c 75d 30c 125$ 300 335 375 30 300 350 260 250$2,200PreconfirmationBalance SheetAdjustmentsDebitsCreditsReorganizedBalance Sheet

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Comparative Balance Sheetsat June 30, 2004 (000)Equities (claims)Short-term bank loanAccounts payableWages payablePrepetition claimsAccounts payable, oldTaxes payableInterestBank note15% bonds payable

$ 75 125 55

600 150 90 260 1,200

h 600

i 90j 260g1,200

$ 75 125 55

150 PreconfirmationBalance SheetAdjustmentsDebitsCreditsReorganizedBalance Sheet

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Comparative Balance Sheetsat June 30, 2004 (000)Stockholders EquityCapital stock, oldDeficit

500(1,000)

k 500c 75d 30e 125

a 25b 100f 250g 100h 185i 90j 80k 400

PreconfirmationBalance SheetAdjustmentsDebitsCreditsReorganizedBalance Sheet

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Comparative Balance Sheetsat June 30, 2004 (000)New EquitiesCurrent portion, bonds12% senior debtSubordinated debt

Common stock, new

Retained earnings, new

$2,055

g 100g 500h 275j 120g 500h 140j 60k 100

100 500

395

800

$2,200PreconfirmationBalance SheetAdjustmentsDebitsCreditsReorganizedBalance Sheet

17 - #2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Chapter 10-#

InsolvencyLiquidation and ReorganizationAdvanced Accounting, Third Edition10

Chapter 10-#Distinguish between a Chapter 7 and a Chapter 11 bankruptcy.Describe the five priority categories of unsecured claims and list the order in which they are settled.Distinguish between a voluntary and involuntary bankruptcy petition.Distinguish among fully secured, partially secured, and unsecured claims of creditors.Describe contractual agreements that the debtor and its creditors may enter into outside of formal bankruptcy proceedings to resolve the debtors insolvent position.Learning Objectives

Chapter 10-#1. On the topic, Challenges Facing Financial Accounting, what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).Forward-looking Information Soft Assets (a companys know-how, market dominance, marketing setup, well-trained employees, and brand image).Timeliness (no real time financial information)

InsolvencyWhen a business becomes insolvent, it generally has three possible courses of action: Debtor and its creditors may enter into a contractual agreement, outside bankruptcy; Debtor or its creditors may file a bankruptcy petition, after which the debtor is liquidated under Chapter 7 of the Bankruptcy Reform Act; or Debtor or its creditors may file a petition for reorganization under Chapter 11 of the Bankruptcy Reform Act.

Chapter 10-#

Insolvency means that a debtor has more current liabilities than current assets.Review:FalseInsolvency

Chapter 10-#Technical Bulletins provide answers to specific questions related to the application and implementation of FASB Statement or Interpretations, APB Opinions, and ARBs. Technical Bulletins do not alter GAAP; they merely provide guidance on questions related to existing GAAP.

Contractual AgreementsLO 5 Contractual agreements.A business that is unable to pay its obligations may reach an accommodation with its creditors. Possibilities generally include: An extension of payment periods.Composition agreements.Formation of a creditors committee.Voluntary assignment of assets.

Chapter 10-#

Contractual AgreementsLO 5 Contractual agreements.Extension of Payment PeriodsStatement of Financial Accounting Standard No. 15 Provides that where a debt restructuring involves only a modification of terms of payment, the debtor should account for the restructuring prospectively and not change the carrying amount of the payable, unless the carrying amount exceeds the total future cash payments of principal and interest specified by the new terms. No gain is recognized.

Chapter 10-#

Contractual AgreementsLO 5 Contractual agreements.Composition Agreements (Creditors Accept Less Than Full Amount)Creditors are often given some immediate cash payment, and the amount of the remaining debts and their interest rates are renegotiated.Formation of a Creditors CommitteeCommittee is responsible for managing the debtors business affairs for the period during which plans are developed to rehabilitate, reorganize, or liquidate the business.

Chapter 10-#

Contractual AgreementsLO 5 Contractual agreements.Voluntary Assignment of AssetsA debtor may elect to place its property under the control of a trustee for the benefit of its creditors. Any proceeds remaining after payment of the creditors, are returned to the debtor.

Chapter 10-#

BankruptcyProvisions of the Bankruptcy Reform Act apply to individuals, corporations, and partnerships, as well as to municipalities seeking voluntary relief from their creditors.A business unable to pay its obligations, may attempt to negotiate with its creditors. If an agreement cannot be reached, a legal petition for bankruptcy will be initiated by either thedebtor (a voluntary petition) or its creditors (an involuntary petition).LO 3 Voluntary vs. involuntary petitions.

Chapter 10-#

BankruptcyLO 3 Voluntary vs. involuntary petitions.Voluntary PetitionsA debtor may file a voluntary petition with a bankruptcy court for; liquidation under Chapter 7 or for reorganization under Chapter 11. Filing a voluntary petition constitutes an order for relief. The bankruptcy petition (either voluntary or involuntary) is an official form that initiates bankruptcy proceedings and establishes an estate consisting of the debtors assets.

Chapter 10-#

BankruptcyLO 3 Voluntary vs. involuntary petitions.Involuntary PetitionsCreditors initiate the action by filing a petition for liquidation or reorganization with the bankruptcy court.The bankruptcy court will generally enter an order for relief against the debtor only if evidence indicates that the debtor, in fact, has not been paying its debts as they become due.

Chapter 10-#

BankruptcyLO 4 Secured and unsecured creditors.Secured and Unsecured CreditorsSecured creditors are those whose claims are secured by liens or pledges of specific assets. If the proceeds from the sale of a pledged asset(s) exceed the secured claim, the excess proceeds are available for distribution to unsecured creditors.

Chapter 10-#

Voluntary bankruptcy petitions may be filed under either Chapter 7 or Chapter 11 of the Reform Act.Review:TrueBankruptcyLO 4 Secured and unsecured creditors.


Unsecured creditors with priority will receive full satisfaction before secured creditors are paid.Review:FalseBankruptcyLO 4 Secured and unsecured creditors.


Liquidation (Chapter 7)A voluntary or involuntary petition for liquidation may be filed under Chapter 7 of the Reform Act. Upon filing, the bankruptcy court must decide whether to accept or dismiss the petition. Dismissals occur infrequently. Debtor may dispute an involuntary petition.If accepted, an order for relief is entered and the bankruptcy court will appoint an interim trustee until a permanent trustee is selected.LO 7 Chapter 1 versus Chapter 7.

Chapter 10-#

Reorganization Under Reform Act (Chapter 11)Creditors of an insolvent debtor may believe their interests would be served by rehabilitating or reorganizing the debtor. In such a case:Creditors and debtor may agree to a plan for reorganization. Debtor or creditors may prefer to file with the bankruptcy court a petition for reorganization under Chapter 11 of the Reform Act.LO 7 Chapter 1 versus Chapter 11.

Chapter 10-#

Reorganization Under Reform Act (Chapter 11)LO 7 Chapter 1 versus Chapter 11.Fresh Start Accounting and Quasi ReorganizationWhen firms emerge from bankruptcy, SOP 90-7 provides for fresh start accounting. Assets and liabilities are reported at fair values.Beginning retained earnings is reported at zero. Two conditions must exist: Fair value of assets must be less than the post liabilities and allowed claims, and Original owners must own less than 50% of the voting stock after reorganization.

Chapter 10-#

Reorganization Under Reform Act (Chapter 11)LO 7 Chapter 1 versus Chapter 11.Fresh Start Accounting and Quasi ReorganizationQuasi reorganizationPer Accounting Research Bulletin No. 43, three steps are required:Authorization from creditors and stockholders is required.All assets are revalued to fair values with losses recorded in retained earnings.The deficit in retained earnings is eliminated by charging to (reducing) paid-in capital.

Chapter 10-#

Reorganization Under Reform Act (Chapter 11)Accounting for Reorganization Troubled DebtDebt may be restructured in any one (or a combination) of the following methods:The debtor may transfer assets in full settlement of the payable. The debtor may give an equity interest in its firm in full settlement of the payable.The creditor may modify terms of the payable.LO 7 Chapter 1 versus Chapter 11.

Chapter 10-#

Reorganization Under Reform Act (Chapter 11)LO 7 Chapter 1 versus Chapter 11.Transfer of AssetsA debtor that transfers assets to a creditor in full settlement of a payable recognizes a gain.The gain is measured by the excess of the carrying value of the payable over the fair value of the assets transferred.The difference between the fair value and the carrying amount of the assets transferred is a gain or loss and is reported as a component of net income for the period of transfer.Accounting for Reorganization Troubled Debt

Chapter 10-#

Reorganization Under Reform Act (Chapter 11)LO 7 Chapter 1 versus Chapter 11.Grant of an Equity InterestA debtor that issues an equity interest in its firm to a creditor in full settlement of a payable shall account for the equity interest at its fair value. Difference between the fair value of the equity interest issued and the carrying amount of the payable is reported as a gain on restructuring. Debtor determines its gain based on undiscounted cash flows.Accounting for Reorganization Troubled Debt

Chapter 10-#

Reorganization Under Reform Act (Chapter 11)LO 7 Chapter 1 versus Chapter 11.Modification of TermsA debtor, in a troubled debt restructuring involving only modification of terms of a payable, accounts for the effects of the restructuring prospectively from the time of restructuring.The carrying value of the payable is not changed at the time of restructuring unless the carrying value exceeds the total future cash payments specified by the new terms.Accounting for Reorganization Troubled Debt

Chapter 10-#

In a reorganization involving a transfer of assets, the debtor will recognize a gain on restructuring measured by the excess of the carrying value of the payable settled over the book value of the assets transferred.Review:FalseReorganization Under Reform Act (Chapter 11)LO 7 Chapter 1 versus Chapter 11.


E10-3 Bar Company, which is in financial difficulty and in the process of a voluntary reorganization, has agreed to transfer to a creditor a copyright it owns in full settlement of a $150,000 note payable and $15,000 in accrued interest. The copyright, which originally cost $100,000, has an accumulated amortization balance of $55,000 and a current fair value of $95,000.Required: Prepare the journal entries on Bar Companys books to record the transfer of the copyright.Reorganization Transfer of AssetsLO 7 Chapter 1 versus Chapter 11.

Chapter 10-#

Copyright 50,000 Gain on Transfer of Assets 50,000 Revalue copyright to fair value. $95,000 ($100,000 - $55,000)Notes Payable 150,000Accrued Interest Payable15,000Accumulated Amortization Copyright55,000 Copyright ($100,000 + $50,000) 150,000Gain on Debt Restructuring70,000 E10-3 a. Prepare the journal entries on Bar Companys books to record the transfer of the copyright.Reorganization Transfer of AssetsLO 7 Chapter 1 versus Chapter 11.

Chapter 10-#

The gain on transfer of assets ($50,000) should be reported as a separate component (assuming material in amount) of operating income; the gain on restructuring ($70,000) should also be reported as a separate component of operating income.E10-3 b. Explain the proper treatment of any gain or loss recognized in (A).Reorganization Transfer of AssetsLO 7 Chapter 1 versus Chapter 11.

Chapter 10-#

Loss on Transfer of Assets 15,000 Copyright 15,000 Revalue copyright to fair value. $30,000 ($100,000 - $55,000)Notes Payable 150,000Accrued Interest Payable15,000Accumulated Amortization Copyright55,000 Copyright ($100,000 - $15,000) 85,000Gain on Debt Restructuring ($165,000 - $30,000)135,000 E10-3 c. Assuming the fair value of the copyright was $30,000, repeat the requirement in (A).Reorganization Transfer of AssetsLO 7 Chapter 1 versus Chapter 11.

Chapter 10-#

E10-4 Lake Company, a major creditor of financially troubled Spain Company, has agreed to modify the terms of a debt owed to Lake Company. The debt consists of a $900,000, 12% note that is due currently along with accrued interest of $95,000. Lake Company agreed to extend the due date of the note and accrued interest for three years and to reduce the interest rate to 5% per annum (on both maturity value and accrued interest), with interest to be paid annually.Required:a. Should a gain on restructuring be recognized by Spain Company? Explain.Reorganization Modification of TermsLO 7 Chapter 1 versus Chapter 11.

Chapter 10-#

No gain should be recognized because the total future cash payments specified by the new terms of $1,144,250 ($995,000 carrying value plus 3 years interest at $49,750 per year) exceed the current carrying value of the debt, $995,000.

E10-4 a. Should a gain on restructuring be recognized by Spain Company? Explain.LO 7 Chapter 1 versus Chapter 11.Reorganization Modification of Terms

Chapter 10-#

Note Payable 900,000Accrued Interest Payable 95,000 Restructured Debt995,000 E10-4 b. Prepare the entry that should be made on Spain Companys books on the date of restructure.LO 7 Chapter 1 versus Chapter 11.Reorganization Modification of Terms

Chapter 10-#

Restructuring gains that arise from troubled debt restructurings are reported by the debtor as extraordinary gains.Review:FalseReorganization Under Reform Act (Chapter 11)LO 7 Chapter 1 versus Chapter 11.


Reorganization Under Reform Act (Chapter 11)LO 7 Chapter 1 versus Chapter 11.A plan for reorganization must show that creditors will receive as much as if the debtor were liquidated.The Statement of Affairs is an accounting report that is designed to permit the user to determine: the total expected amounts that could be realized on the disposition of the assets, the priorities in the use of the realization proceeds in satisfying claims, and the potential net deficiency that would result if the assets were realized and claims liquidated.The Accounting Statement of Affairs

Chapter 10-#

Reorganization Under Reform Act (Chapter 11)LO 7 Chapter 1 versus Chapter 11.E10-7 Ball Company is facing bankruptcy proceedings. A balance sheet and other information are presented below:Ball Company Balance Sheet - June 30, 2009

Accounts receivable and inventory are each pledged as security on individual notes payable in the amount of $100,000 each.

Chapter 10-#

E10-7 Statement of AffairsReorganization Under Reform Act (Chapter 11)

Chapter 10-#

E10-7 Statement of AffairsReorganization Under Reform Act (Chapter 11)* ($255,000) loss - $130,400 gain = $124,600 deficiency

Chapter 10-#

E10-7 Deficiency AccountReorganization Under Reform Act (Chapter 11)

Chapter 10-#

The statement of affairs is a report designed to estimate the amount expected to be earned by a debtor company during the time period needed to complete a reorganization.Review:FalseReorganization Under Reform Act (Chapter 11)LO 7 Chapter 1 versus Chapter 11.


Trustee Accounting and ReportingLO 7 Chapter 1 versus Chapter 11.Trustee takes title to the debtors assets and is accountable to the court, the creditors, and other parties for the subsequent utilization or realization of the assets.Trustee records the assets at their book values.No existing liabilities are recorded by the trustee.Payment of preexisting debts reduces the assets.

Chapter 10-#

Trustee Accounting and ReportingLO 7 Chapter 1 versus Chapter 11.E10-9 TRX Company has been forced into receivership. The trustee has decided to open a new set of books to distinguish between transactions occurring before and after the appointment. The following account balances were reported on September 1, 2009:

Required: Prepare journal entries to record the following on the trustee set of books.

Chapter 10-#

Cash 26,700Accounts Receivable (old)130,400Inventory191,900Property and Equipment590,400 Allowance for Uncollectibles (old) 16,000Accumulated Depreciation211,500TRX Company in Receivership * 711,900

* ($939,400 $16,000 - $211,500)E10-9 Record the receipt of TRX Company assets. Trustee Accounting and ReportingLO 7 Chapter 1 versus Chapter 11.

Chapter 10-#

Cash 31,500Accounts Receivable (new)264,500Sales 296,000E10-9 1. Sales were made in the amount of $296,000, of which $31,500 were cash sales.Trustee Accounting and ReportingLO 7 Chapter 1 versus Chapter 11.

Chapter 10-#

E10-9 2. Receivables were collected in the following amounts:Old receivables $ 76,800 New receivables 242,200Trustee Accounting and ReportingLO 7 Chapter 1 versus Chapter 11.Cash319,000Accounts Receivable (old)76,800Accounts Receivable (new)242,200

Chapter 10-#

E10-9 3. Additional inventory was purchased on account in the amount of $127,500.Trustee Accounting and ReportingLO 7 Chapter 1 versus Chapter 11.Purchases127,500Accounts Payable (new)127,500

Chapter 10-#

E10-9 4. Cash payments were made as follows:On old accounts payable $206,500On new accounts payable 61,600For operating expenses 46,000For trustee fees 13,000Trustee Accounting and ReportingLO 7 Chapter 1 versus Chapter 11.TRX Company in Receivership206,500Accounts Payable (new)61,600Operating Expenses46,000Trustee Expenses13,000Cash327,100

Chapter 10-#

E10-9 5. Journal entries were made to record:Bad debt expense of $21,600, of which $8,600 related to new accounts receivable.Trustee Accounting and ReportingLO 7 Chapter 1 versus Chapter 11.Bad Debt Expense21,600 Allowance for Uncollectibles (old)13,000 Allowance for Uncollectibles (new)8,600

Chapter 10-#

E10-9 5. Journal entries were made to record:a.Bad debt expense of $21,600, of which $8,600 related to new accounts receivable.b.Depreciation expense of $32,400.c.Write-off of old accounts receivable of $21,000.Trustee Accounting and ReportingLO 7 Chapter 1 versus Chapter 11.Depreciation expense32,400Accumulated Depreciation32,400Allowance for Uncollectibles (old)21,000Account Receivable (old)21,000

Chapter 10-#

The court expects to receive periodic reports summarizing the realization and distribution activities of the trustee.The report, realization and liquidation account, has three main sectionsassets, liabilities, and revenues and expenses.The asset section consists of four parts, illustrated as follows:Realization and Liquidation AccountLO 7 Chapter 1 versus Chapter 11.

Assets to be realized Assets realizedAssets acquired Assets not realizedAssets

Chapter 10-#

The court expects to receive periodic reports summarizing the realization and distribution activities of the trustee.The report, realization and liquidation account, has three main sectionsassets, liabilities, and revenues and expenses.The liabilities section consists of four parts, illustrated as follows:Realization and Liquidation AccountLO 7 Chapter 1 versus Chapter 11.

Liabilities liquidated Liabilities to be liquidatedLiabilities not liquidated Liabilities incurredLiabilities

Chapter 10-#

Copyright 2008 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.Copyright

Chapter 10-#

Case 1a (2)Cash$ 20,400Accounts payable$ 350,000Accounts receivable170,000Accured wages120,000Inventory180,000Notes payable200,000Property and Equipment, net430,000Common stock400,000Retained earnings (deficit)124,600$ 800,400$ 1,194,600Estimated realizable values:Accounts receivable$ 95,000Inventory110,000Property and Equipment, net320,0001,600,000600,0002,200,000500,000500,000- 03,000,0001,000,0001,000,0003,000,000400,00013,500386,500305,000305,000- 0- 0- 0- 0- 0- 0- 031,500420,000678,500- 0290,000- 0- 0- 0- 0- 0- 0- 0

&A

Case 1a (2)BookRealizableDeficiencyValueAssetsValueAccount(Loss) / GainAssets Pledged with Fully Secured Creditors:$ 180,000Inventory$ 110,000$ (70,000)Note Payable100,00010,000Assets Pledged with Partially Secured Creditors:170,000Accounts Receivable95,000(75,000)Note Payable100,000Free Assets20,400Cash20,400430,000Property and Equipment320,000(110,000)Total Net Realizable Value350,400Liabilities having Priority Wages120,000Net Free Assets230,400Estimated Deficiency to Unsecured Creditors124,600$ 800,400$ 355,000$ (255,000)1,600,000600,0002,200,000500,000500,000- 03,000,0001,000,0001,000,0003,000,000P Company400,00013,500386,500S Company305,000305,000- 0- 0- 0- 0- 0- 0- 031,500420,000678,500- 0290,000678,500678,500Total liab. & equity5,000,0002,405,0001,850,000710,0006,265,000

&A

Case 1a (2)BookRealizableDeficiencyValueEquitiesValueAccountLiabilities Having Priority:(Loss) / Gain$ 120,000Accrued Wages$ 120,000Fully Secured Creditors:100,000Note Payable100,000Partially Secured Creditors:100,000Note Payable100,000`95,0005,000Unsecured Creditors:350,000Accounts Payable350,000Stockholders Equity400,000Common Stock400,000(269,600)Retained Earnings (deficit)(269,600)$ 800,400$ 355,000$ 130,400Estimated deficiency *$ (124,600)1,600,000600,0002,200,000500,000500,000- 03,000,0001,000,0001,000,0003,000,000P Company400,00013,500386,500S Company305,000305,000- 0Retained Earnings (deficit)- 0- 0(269,600)- 0- 031,500420,000678,500- 0290,000678,500678,500Total liab. & equity5,000,0002,405,0001,850,000440,400- 0

&A

Case 1a (2)BALL COMPANYDeficiency AccountEstimated LossesEstimated GainsAccounts Receivable$ 75,000Common Stock$ 400,000Inventory70,000Retained Earnings(269,600)Property and Equipment110,000Estimated Deficiency toUnsecured Creditors124,600$ 255,000$ 255,0001,600,000600,0002,200,000500,000500,000- 03,000,0001,000,0001,000,0003,000,000400,00013,500386,500305,000305,000- 0- 0- 0- 0- 0- 0- 031,500420,000678,500- 0290,000- 0- 0- 0- 0- 0- 0- 0

&A

Case 1a (2)Cash$ 26,700Allowance for uncollectibles$ 16,000Accounts receivable130,400Accumulated depreciation211,500Inventory191,900Accounts payable308,400Property and Equipment, net590,400Capital stock800,000Retained earnings (deficit)(396,500)$ 939,400$ 939,4001,600,000600,0002,200,000500,000500,000- 03,000,0001,000,0001,000,0003,000,000400,00013,500386,500305,000305,000- 0- 0- 0- 0- 0- 0- 031,500420,000678,500- 0290,000- 0- 0- 0- 0- 0- 0- 0

&A

intercompany sales and foreign exchange transactions

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