24_Fischer10e_SM_Ch21_final - CHAPTER 21 UNDERSTANDING THE...

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CHAPTER 21 UNDERSTANDING THE ISSUES 1. Given a restructuring that is not under bank- ruptcy law, the gain on restructuring is meas- ured as the amount by which the book value of the debt, including accrued interest, exceeds the total of all restructured principal and interest payments. If the total payments exceed the book value, no gain is recognized. Note that the present value of the payments received is not considered in the determination of the gain. For a restructuring that is under bankruptcy law, the gain is measured as the amount by which the book value of the debt, including accrued in- terest, exceeds the fair value of the restruc- tured consideration received. The value of the consideration received is the net present value of the restructured payments. 2. A corporate reorganization is a legal remedy designed to restructure the debt and/or equity of a troubled company so that the company may continue to operate and ultimately become financially sound. The ultimate goal of a reor- ganization is to provide a more attractive altern- ative than liquidation and allow the company to continue its business purpose. A corporate li- quidation does not hold promise for a recovery but rather is designed to facilitate a termination of the business. Assets of the company are converted into a distributable form and con- veyed to creditors and shareholders to whatever extent possible. Upon completion of the distribution of assets, the business entity ceases to exist. 3. If a creditor is fully secured, by definition no portion of their claim will become unsecured. However, if the value of the assets securing their claim exceeds the amount of the claim, such excess amounts will become available to unsecured creditors. The claims of partially se- cured creditors exceed the value of the assets securing their claims. Therefore, the unsecured amounts are combined with the other existing unsecured claims. Once the total of all unse- cured claims is identified, those unsecured claims will proceed against the remaining as- sets of the company in order of priority. 4. The statement of realization and liquidation serves several purposes. First, it provides a reporting of the activities of the trustee in liquid- ation and helps discharge the fiduciary responsibility. The statement also documents that available assets are being distributed prop- erly among the various creditors and in the proper order of priority. A review of the state- ment may also provide outstanding creditors with some sense of how much they may receive in satisfaction of their claims. 51
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EXERCISES Note: Some calculations may vary due to rounding or method of calculation. Answers presented have been determined using Excel.
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This note was uploaded on 02/05/2010 for the course ACC 476 taught by Professor Hildy during the Spring '07 term at Lane.

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24_Fischer10e_SM_Ch21_final - CHAPTER 21 UNDERSTANDING THE...

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