Question

Mannheim Corporation is ready to emerge from Chapter 11 bankruptcy under a reorganization plan accepted by all parties. Mannheim's balance sheet shows:

Various assets	$2,000,000	Prepetition liabilities, fully secured	$ 400,000
		Prepetition liabilities subject to compromise	1,360,000
		Postpetition liabilities	820,000
		Shareholders' equity	(580,000)
TOTAL	$2,000,000	TOTAL	$2,000,000

New equity interests in the reorganized company are $160,000. The present value of future cash flows from the reorganized company's operating assets is $2,370,000. The compromised amount of Mannheim's prepetition liabilities is

$1,360,000.

$1,390,000.

$2,210,000.

$ 990,000.

Answer 1

When a company emerges from chapter 11 bankruptcy, any prepititioned liability that is not secured by assets is likely to be compromised. Since the present value of future cash flows increased to $2,370,000 from $2,000,000, the excess of$ 370,000 is used to pay off the liabilities secured by assets. The remainder of $30,000 falls under compromised prepetitioned liabilities, resulting in a total of $1,390,000 under the category "compromised amount of prepetitioned liabilities".