Liabilities with priority: Salaries payable . Fully secured creditors: Notes payable (secured by land and buildings valued at $84,000)... Partially secured creditors: Notes payable (secured by inventory valued at $30,000) . Unsecured creditors: Notes payable.... Accounts payable. Accrued expenses $ 18,000 70,000 140,000 50,000 10,000 4,000
Holmes Corporation has filed a voluntary petition with the bankruptcy court in hopes of reorganizing. A statement of financial affairs has been prepared for the company showing these debts:
Holmes has 10,000 shares of common stock outstanding with a par value of $5 per share. In addition, it is currently reporting a deficit balance of $132,000.
Company officials have proposed the following reorganization plan:
• The company’s assets have a total book value of $210,000, an amount considered to be equal to fair value. The reorganization value of the assets as a whole, though, is set at $225,000.
• Employees will receive a one-year note in lieu of all salaries owed. Interest will be 10 percent, a normal rate for this type of liability.
• The fully secured note will have all future interest dropped from a 15 percent rate, which is now unrealistic, to a 10 percent rate.
• The partially secured note payable will be satisfied by signing a new 6-year $30,000 note paying 10 percent annual interest. In addition, this creditor will receive 5,000 new shares of Holmes’s common stock.
• An outside investor has been enlisted to buy 6,000 new shares of common stock at $6 per share.
• The unsecured creditors will be offered 20 cents on the dollar to settle the remaining liabilities.
If this plan of reorganization is accepted and becomes effective, what
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