Creditor’s remedy under a liquidation versus a restructuring. Your client, Imax Financial, originally lent Wiedemeyer Manufacturing $1,000,000. Unfortunately, the loan is in default, and $900,000 of principal and $20,000 of accrued interest remains unpaid. Imax is deciding whether to encourage other creditors to commence an involuntary bankruptcy proceeding against Wiedemeyer or to restructure their unpaid loans. Details surrounding the assets and liabilities of Wiedemeyer are as follows:
|
Book Value |
||||
|
Debit |
Credit |
Estimated Net |
Note |
|
|
Cash and cash equivalents |
$ 115,000 |
$ 115,000 |
|
|
|
Accounts receivable |
650,000 |
580,000 |
1 |
|
|
Inventory |
875,000 |
750,000 |
2 |
|
|
Other current assets |
180,000 |
177,100 |
||
|
Property, plant, and equipment (net) |
3,500,000 |
3,600,000 |
3 |
|
|
Goodwill |
250,000 |
|||
|
Accounts payable |
|
$1,100,000 |
||
|
Other current liabilities |
|
285,000 |
4 |
|
|
Bank line of credit |
|
400,000 |
||
|
Mortgage payable |
|
2,800,000 |
||
|
Loan to Imax |
|
920,000 |
||
Notes:
1. Receivables with a book value of $500,000 and a net realizable value of $460,000 were used to secure the bank line of credit. Under the terms of the line of credit an amount equal to 80% of the qualified receivables could be loaned.
2. Inventory was used to secure $800,000 of accounts payable. The relevant inventory has a book value of $700,000 and a net realizable value of $670,000.
3. Land and buildings with a combined book value of $2,900,000 and a net realizable value of $3,000,000 serve as collateral for the mortgage payable. Additional land with a book value of
$300,000 and a net realizable value of $500,000 serves as collateral on the Imax loan.
4. Other current liabilities consist of the following:
a. A vehicle loan with an unpaid balance of $15,000. The subject vehicle has a book value of $20,000 and a fair value of $12,000.
b. A $40,000 note due officers of the corporation. The note is unsecured.
c. Unpaid wages of $160,000.
d. Unpaid contributions to the corporate pension plan in the amount of $20,000.
e. Miscellaneous general creditors in the amount of $50,000.
Rather than forcing Wiedemeyer into bankruptcy, Imax would possibly consider restructuring their loan. However, any possible restructuring would have to include a stated interest rate of 8.5% with interest payments due on a quarterly basis. Furthermore, the term of the restructured loan could not exceed five years.
Prepare a schedule that would determine how much of the Imax loan would have to be forgiven in a restructuring in order to place Imax in the same position as it would have been if Wiedemeyer had been liquidated. Also, determine the periodic payment to be made by Wiedemeyer if the loan were restructured.