Problem. The following balance sheet shows the condition of the A B C Company as on December 31, 1918.
A B C Company
Balance Sheet, December 31, 1918
| Cash | $ 3,000.00 | Notes Payable | $ 25,000.00 | |
| Notes Receivable | 55,000.00 | Accounts Payable | 310,000.00; | |
| Accts. Rec. | $255,000 | Accrued Expenses | 10,000.00 | |
| Res. for Bad Debts | 5,000 | 250,000.00 | Bonds Payable | 175,000.00 |
| Merchandise | 77,000.00 | Total Liabilities | $520,000.00 | |
| X Y Co. Stock | 30,000.00 | |||
| Mach. & Equip | $ 95,000 | Capital Stock | 250,000.00 | |
| Depr. Res | 25,000 | 70,000.00 | Surplus | 25,000.00 |
| Buildings | $ 88,000 | |||
| Depr. Res | 13,000 | 75,000.00 | ||
| Land | 110,000.00 | |||
| Good-Will | 125,000.00 | |||
| $795,000.00 | $795,000.00 | |||
The company has had difficulty in meeting its current claims. Interest to the amount of $5,000 on its bonds is past due. On January 10, 1919, it would become liable for $30,000 on accommodation paper to that amount, because of the bankruptcy of the makers. It is estimated that the creditors will receive 50% of their claims. At a meeting of its creditors, where this condition of affairs was disclosed, it was decided to have a statement prepared to show the condition of the company on a liquidating basis, any action respecting a petition in bankruptcy to be deferred until after receipt of such statement. An appraisal committee made the following report, to be used as the basis for the statement.
In the cash are found I O U memos, not collectible, $500. The notes receivable, all estimated good, are pledged with creditors on open account to secure claims of $61,000. Of the accounts receivable, $100,000 are good, $80,000 doubtful, estimated at 50% of their value, and the remainder bad. The merchandise is estimated to bring in $50,000, the machinery $20,000, and the land $125,000. The land and buildings are expected to yield no surplus above the claims of bondholders. The X Y Co. stock is pledged with the holders of notes payable and should produce a surplus of $10,000. The accrued expenses comprise taxes $1,500, unpaid pay-roll $3,500, and bond interest $5,000.
Solution
A B C Company
Statement of Affairs
| Book Values | Assets | Items | Expected to Realize | Shrinkages |
|---|---|---|---|---|
| $ 3,000.00 | Cash | $ 2,500.00 | $ 500.00 | |
| 250,000.00 | Accounts Receivable: | |||
| Good | $100,000.00 | 100,000.00 | ||
| Doubtful—worth 50% | 80,000.00 | 40,000.00 | 40,000.00 | |
| Bad $75,000.00 | ||||
| Less Reserve 5,000.00 | 70,000.00 | 70,000.00 | ||
| $250,000.00 | ||||
| 30,000.00 | Claim Against Accommodated Party | |||
| (Estimated to yield 50%) | 15,000.00 | 15,000.00 | ||
| 77,000.00 | Merchandise | 50,000.00 | 27,000.00 | |
| 70,000.00 | Machinery | 20,000.00 | 50,000.00 | |
| Securities Pledged with Creditors: | ||||
| Partly Secured: | ||||
| 55,000.00 | Notes Receivable (Deducted contra) | $ 55.000 00 | ||
| Fully Secured: | ||||
| 75,000.00 | Buildings | $ 55,000.00 | 20,000.00 | |
| 110,000.00 | Land (at market) | 125,000.00 | [76]15,000.00 | |
| Deducted contra | $ 180,000.00 | |||
| 30,000.00 | X Y Co. Stock (at market) | 35,000.00 | [77] 5,000.00 | |
| Deducted contra | ||||
| Excess over Claims against it | 10,000.00 | |||
| 125,000.00 | Good-Will. | 125,000.00 | ||
| Total Unpledged Assets | $237,500.00 | |||
| Less Preferential Creditors | ||||
| (see contra) | 5,000.00 | |||
| Net Free Assets for Unsecured Claims | $232,500.00 | |||
| Deficiency | ||||
| see Deficiency Account) | 52,500.00 | |||
| $825,000.00 | $285,000.00 | $327,500.00 | ||
A B C Company
Statement of Affairs
(Continued)
| Book Values | Liabilities | Items | Expected to Rank | |
|---|---|---|---|---|
| Unsecured Creditors: | ||||
| $249,000.00 | Accounts Payable | $310,000.00 | ||
| Less Partly Secured | 61,000.00 | $249,000.00 | ||
| Partly Secured Creditors: | ||||
| 61,000.00 | Accounts Payable | $61,000.00 | ||
| Less Notes Receivable Held as Security | 55,000.00 | 6,000.00 | ||
| Fully Secured Creditors: | ||||
| 25,000.00 | Notes Payable | $25,000.00 | ||
| X Y Co. Stock Held as Security | 35,000.00 | |||
| Excess of Security Carried contra | $10,000.00 | |||
| Bonds Payable. | $175,000.00 | |||
| Accrued Interest on Bonds | 5,000.00 | $180,000.00 | ||
| Land & Buildings Held as Security | 180,000.00 | |||
| Contingent Liabilities: | ||||
| 30,000.00 | Accommodation Notes. | |||
| Maker, now bankrupt, will pay 50% | 30,000.00 | |||
| Preferential Creditors: | ||||
| 1,500.00 | Taxes | $1,500.00 | ||
| 3,500.00 | Wages | 3,500.00 | ||
| Deducted contra | $5,000.00 | |||
| 250,000.00 | Capital Stock | |||
| 25,000.00 | Surplus | |||
| $825,000.00 | $285,000.00 | |||