Page 73 - Bankruptcy Volume 1

Total current liabilities 2,025,000

Bonds payable, 3% fully secured 4,000,000
Total liabilities not subject to com-
promise 6,025,000
Liabilities subject to compromise (Note
A) 7,695,000

Total liabilities $13,720,000

The notes to the financial statements include the following:

Note A: On July 5, 201X, the company filed a Chapter 11 bankruptcy petition.

Liabilities subject to compromise consist of the following:

Secured debt, 14% secured by first mort-
gage on building $ 1,000,000

Priority tax claims 610,000
Senior subordinated secured notes (15%) 4,000,000
Accounts payable and other miscellane-
ous claims 1,085,000

Subordinated debentures (17%) 1,000,000
Total $ 7,695,000

In this example, because of the low interest rate on the 3% secured bonds, the debtor intends to leave the
bonds unimpaired. Because of the value of the underlying collateral, the debtor would be required to re-
pay this debt in full should the debtor decide to settle the debt as part of its plan of reorganization. How-
ever, this would not make economic sense because the debtor would not be able to replace the debt at
the current less-than-market rate. Accordingly, the 3% secured bonds are listed as long-term liabilities
that are not subject to compromise.

Reporting Claim Value

The debtor should report liabilities that may be affected by the plan at the expected amount of the claim
allowed, even though those liabilities may be settled under a plan of reorganization for a lesser amount.
Once the allowed amount of an existing claim is determined or can be estimated, the accountant should
adjust the carrying value of the liability to reflect the amount allowed. For example, assume the debtor
closed a location before the bankruptcy filing and at that time recorded a liability for the remaining rent
owed under the location’s long-term lease. However, real property lease claims are specifically limited
under the Bankruptcy Code and the total amount due under the long-term lease may exceed the amount
that would be allowed under the Bankruptcy Code, as is the case in this example. Accordingly, upon fil-
ing for Chapter 11, the amount of the landlord’s claim as recorded prepetition would be reduced to the
amount allowable under the Bankruptcy Code. The gain or loss resulting from the adjustment entries is
reported as a reorganization item.

FASB ASC 852-10-45-6 provides that debt discounts or premiums, as well as debt issue costs, should be
considered as part of the valuation of the related debt. If the allowed claim differs from the net carrying
amount of the debt, the accountant should adjust the discount or premium and deferred issue costs to the

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