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roth company is insolvent and in the process of filing for relief under the provisio 738096

Roth Company is insolvent and in the process of filing for relief under the provisions of the Bankruptcy Reform Act of 1978. Roth has no cash, and the com pany’s balance sheet currently shows Accounts Payable of $48,000. Roth owes an additional $8,000 in connection with various expenses but has not yet recorded these amounts. The company’s assets with an indication of both book value and anticipated net realizable value follow:

Book Expected Net

Value Realizable Value

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 31,000 $ 9,000

Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

48,000 36,000

Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10,000 18,000

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

80,000 75,000

Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

190,000 160,000

Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . .

(38,000)

Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

110,000 20,000

Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . .

(61,000)

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,000 –0–

Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$375,000 $318,000

Roth has three notes payable, each with a different maturity date:

• Note 1 due in 5 years—$220,000, secured by a mortgage lien on Roth’s land and buildings.

• Note 2 due in 8 years—$30,000, secured by Roth’s investments.

• Note 3 due in 10 years—$35,000, unsecured.

Of the accounts payable that Roth owes, $10,000 represents salaries to employees. However, no individual is entitled to receive more than $4,100. An additional $3,000 due to the U.S. government in connection with taxes is included in this liability amount.

The company reported the stockholders’ equity balance of $42,000 at the current date: common stock of $140,000 and a deficit of $98,000. Liquidating the company will lead to administrative expenses of approximately $20,000.

Requi r ed

a. Prepare a statement of financial affairs for Roth to indicate the expected availability of funds if the company is liquidated.

b . Assume that Roth owes Philip, Inc., $2,000. This liability is unsecured. If Roth is liquidated, what amount can Philip expect to receive?

c . What amount will be paid on note 2 if Roth is liquidated?

d. Assume that Roth is immediately reorganized. Assume that the company has a reorganization value of $330,000, based on discounted cash flows, and the net realizable value is to be the assigned bal ance for each asset. The accounts payable and accrued expenses are reduced by the parties to $20,000. Note 1 is decreased to a $130,000 note due in four years with a 7 percent annual interest rate. This creditor also receives half of the company’s outstanding stock from the owners. Note 2 is reduced to a $12,000 note due in five years with an 8 percent annual interest rate. This creditor also receives

10 percent of the outstanding stock of the company from the owners. Note 3 is decreased to $5,000 due in three years with a 9 percent annual interest rate. All interest rates are considered reasonable.

Prepare a trial balance for this company after it emerges from bankruptcy.

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