Question

Anteium Company owes $81,100 on a note payable that is currently due. The note is held by a local bank and is secured by a mortgage lien attached to three acres of land worth $48,500. The land originally cost Anteium $31,500 when acquired several years ago. The only other account balances for this company are Investments of $22,600 (but worth $27,600), Accounts Payable of $22,200, Common Stock of $41,200, and a deficit of $89,400. Anteium is insolvent and attempting to arrange a reorganization so that the business can continue to operate. The reorganization value of the company is $83,500.

View each of the following as an independent situation:

1. On a statement of financial affairs, how would this note be reported? How would the land be shown?

2. Assume that Anteium develops an acceptable reorganization plan. Sixty percent of the common stock is transferred to the bank to settle that particular obligation. A 7 percent, three-year note payable for $5,160 is used to settle the accounts payable. How would Anteium record the reorganization?

3. Assume that Anteium is liquidated. The land and investments are sold for $50,500 and $28,600, respectively. Administrative expenses amount to $13,400. How much will the various parties collect?

Answer 1

1)	The land's net realized value is less than the amount of the note payable, the debt will be reported on a statement of financial affairs as a liability owed to "partially secured creditors." The $81,100 obligation Is disclosed In this manner and then reduced by the $48,500 anticipated cash proceeds. The remaining $32,600 balance will be shown by Anteium as an unsecured nonpriority liability.	32600
	The land is still reported as an asset, one pledged with partially secured creditors. The $31,500 cost is revealed within the statement of financial affairs although this information is not considered relevant in a liquidation. The $48,500 net realizable value is reported but is offset by the $81,100 liability; thus, no cash will be available to unsecured creditors unless a greater amount is generated by the sale.
2)	Recording of Reorganization
	Land ($48,500 - $31,500)	17000
	Investments	5160
	Reorganization value in excess of amounts assigned to identifiable assets (83500 - (48500+27600))	7400
	Additional paid‑in capital		29560
	To adjust asset values to fair market value 48500 land + 27600 investments with a reorganization value account established to bring the total up to $84,800.
	After the reorganization, the assets will be reported at $83,500 with one $5,160 debt. Since the common stock has a total par value of $41,200, additional paid in capital must be $41,230	41230
	Note payable	81100
	Additional paid‑in capital (60% of company total) = 41230 x 60%		24738
	Gain on discharge of debt		56362
	To record issuance of stock to bank in settlement of debt
	Accounts payable	22200
	Note payable		5160
	Gain on discharge of debt		17040
	To record settlement of accounts payable for 3‑year note.
	Gain on discharge of debt (56362 + 17040)	73402
	Additional paid‑in capital (balancing)	15998
	Retained earnings (deficit)		89400
	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.
3)	The bank will collect a total of (50,500 + 8809.09=) $59309.09. Obviously, the $50,500 proceeds generated by the land sale must go to the bank with the remaining (81100 - 50500 = $30,600 ) obligation then being ranked as an unsecured-nonpriority liability. Anteium (the insolvent company) will have $15,200 of the $28600 cash left after paying the $13,400 administrative expenses. Unsecured debts total $52800 ($30,600 from the note and $22200 of accounts payable). Thus, 28.79% of these debts will be paid ($15,200/$52800). The bank collects an additional $8809.09 (30600 x 28.79%); the accounts payable collect $6390.91 ($22200 x 28.79%).