FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Firm A, under Chapter 11 bankruptcy proceedings, has an estimated going-concern reorganization (capitalized)
value of $4.0 million. The last pre-bankruptcy balance sheet of the firm is below (this shows the "old" capital
structure). Assume that there are no other claims from any party.
LAST PRE-BANKRUPTCY BALANCE SHEET
ASSETS
Current Assets
Fixed Assets
TOTAL ASSETS
$2,000,000
4,000,000
$6,000,000
LIABILITIES and NET WORTH
Senior Debt
Subordinated Debt
Common Stockholders Equity
TOTAL LIABILITIES and NET WORTH $6,000,000
$2,000,000
3,000,000
1,000,000
Assume that the reorganized "new" capital structure must be 3/4 debt and 1/4 common equity, with $1,000,000 of the
new debt subordinated to senior debt. After the fair distribution of the new securities under the reorganization:
O a. The "old" Senior Debt of $2,000,000 in the last pre-bankruptcy balance sheet will after the reorganization end
up with "new" Senior Debt of $2,000,000.
O b. The "old" Common Stockholders Equity of $1,000,000 in the last pre-bankruptcy balance sheet will after the
reorganization end up with "new" Common Stockholders Equity of $1,000,000.
OC The "old" Subordinated Debt of $3,000,000 in the last pre-bankruptcy balance sheet will after the
reorganization end up with "new" Senior Debt of $1,000,000, and "new" Subordinated Debt of S$1,000,000.
O d. None of the above.
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Transcribed Image Text:Firm A, under Chapter 11 bankruptcy proceedings, has an estimated going-concern reorganization (capitalized) value of $4.0 million. The last pre-bankruptcy balance sheet of the firm is below (this shows the "old" capital structure). Assume that there are no other claims from any party. LAST PRE-BANKRUPTCY BALANCE SHEET ASSETS Current Assets Fixed Assets TOTAL ASSETS $2,000,000 4,000,000 $6,000,000 LIABILITIES and NET WORTH Senior Debt Subordinated Debt Common Stockholders Equity TOTAL LIABILITIES and NET WORTH $6,000,000 $2,000,000 3,000,000 1,000,000 Assume that the reorganized "new" capital structure must be 3/4 debt and 1/4 common equity, with $1,000,000 of the new debt subordinated to senior debt. After the fair distribution of the new securities under the reorganization: O a. The "old" Senior Debt of $2,000,000 in the last pre-bankruptcy balance sheet will after the reorganization end up with "new" Senior Debt of $2,000,000. O b. The "old" Common Stockholders Equity of $1,000,000 in the last pre-bankruptcy balance sheet will after the reorganization end up with "new" Common Stockholders Equity of $1,000,000. OC The "old" Subordinated Debt of $3,000,000 in the last pre-bankruptcy balance sheet will after the reorganization end up with "new" Senior Debt of $1,000,000, and "new" Subordinated Debt of S$1,000,000. O d. None of the above.
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