Page 131 - Bankruptcy Volume 1

 Trade debt — 50% of the common stock (new issue of 500,000 shares)

 Bank debt (includes line of credit and long-term note) — $20 million line of credit at prime plus
3 percentage points; $15 million, 10-year term loan with interest at 10%; 40% of the common
stock (new issue of 400,000 shares)

 Unsecured note — $5 million, 10% loan, 10 years

 Taxes payable — $2.5 million paid over 6 years, interest rate 8%

 Administrative expense — $2.5 million will be paid with cash at the effective date of the plan

 Accounts payable (postpetition) — To be paid in the normal course of business after the plan
confirmation

 Common shareholders — To receive 10% of new stock issue (100,000 shares). (All of the old
stock is canceled. One million shares of new, $1 par value common stock will be issued as a part
of the plan.)

 The new debt instruments issued are at market rates and require no valuation adjustment from
face value.

The tax basis of the assets equals the book values. The tax rate is 40%, and the NOL carryforward is $20
million. The reorganization value of the emerging company is $80 million.

Entry One

The total reorganization value of the equity of the emerging entity equals $30 million (total value of $80
million less debt issued of $50 million). The following entry would be made to record the debt discharge
and the issuance of new debt (in thousands):

Amount Amount
Debit Credit
Taxes payable $ 2,500

Administrative expenses 2,500
Trade payables 22,000
Line of credit 43,000
Long-term debt 5,000

Unsecured note payable 5,000
Cash $ (2,500)
Taxes payable, 6-year installment pay- (2,500)
ments
Line of credit, prime plus 3% (20,000)

Long-term bank loan, 10%, amortizable (15,000)
over 10 years
Long-term unsecured 10-year loan, 10% (5,000)

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