Reference no: EM13505422

(1)

Olds Company declares Chapter 7 bankruptcy. The following are the asset and liability book values at that time; administrative expenses are estimated to be $12,000:

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,000

Accounts receivable. . . . . . . . . . . . . . . . 60,000         (worth $28,000)

Inventory . . . . . . . . . . . . . . . . . . . . . . . . 70,000        (worth $56,000)

Land (secures note A) . . . . . . . . . . . . . . 200,000       (worth $160,000)

Building (secures bonds) . . . . . . . . . . . . 400,000      (worth $320,000)

Equipment. . . . . . . . . . . . . . . . . . . . . . .  120,000       (worth unknown)

Accounts payable . . . . . . . . . . . . . . . . . 180,000

Taxes payable to government. . . . . . . . 20,000

Note payable A . . . . . . . . . . . . . . . . . . . 170,000

Note payable B . . . . . . . . . . . . . . . . . . . 250,000

Bonds payable . . . . . . . . . . . . . . . . . . . . 300,000

The holders of note payable B want to collect at least $125,000. To achieve that goal, how much does the company have to receive in the liquidation of its equipment?

(2)

Kansas City Corporation holds three assets when it comes out of Chapter 11 bankruptcy:

Book Value                Fair Value

Inventory . . . . . . . . . . . . . . . . . . . . . . $ 86,000                    $ 50,000

Land and buildings . . . . . . . . . . . . .   . . 250,000                     400,000

Equipment . . . . . . . . . . . . . . . . . . . . .     123,000                     110,000

The company has a reorganization value of $600,000.

a. Describe the rules to determine whether to apply fresh start accounting to Kansas City.

b. If fresh start accounting is appropriate, how will this company's assets be reported?

c. If a Goodwill account is recognized in re-organization, where should it be reported? What happens to this balance?