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Partnership

Autor:   •  October 18, 2018  •  3,517 Words (15 Pages)  •  467 Views

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- Illustrate the dissolution process by creating a hypothetical cash distribution schedule. Ensure all information is entered accurately.

Please see Appendix B for illustrations

- Corporation:

- Differentiate between various forms of bankruptcy and restructuring that the firm should understand.

- Summarize the key points of interest if the firm fell on hard times and had to file voluntary bankruptcy. What ethical implications should be considered when debating whether or not to file bankruptcy?

If a business files a petition for bankruptcy, it is considered voluntary. Conversely, creditors can force a business into involuntary bankruptcy, provided certain criteria are met. Firms have the option of filing chapter 11 to reorganize the firm’s debt, or chapter 7 to fully liquidate the partnership. It makes sense to reorganize if the entity expects future cash flow sufficient to bring the firm back to solvency. If assets are worth less than liabilities, liquidation may be the best option. Regardless, the company should look at the value under each option and go with the plan that creates the most value.

If a company files for bankruptcy they are going to have difficulties by supplies, merchandise or obtaining lines of credit. Some creditors may decide to sell or lend, but at a higher price or rate to protect themselves. The value of the stock could decrease tremendously if a company is facing financial difficulties.

- Identify the key areas of concern if the firm fell on hard times and their creditors forced them into bankruptcy. What defense are available in this situation?

According to Bob Eisenbach of Cooley, LLP, often times a company files a voluntary bankruptcy petition in response to creditor actions. Section 303 of the Bankruptcy Code states, “if a company has 12 or more creditors, an involuntary bankruptcy petition requires (a) three or more creditors whose claims are not contingent as to liability or subject to a bona fide dispute as to either liability or amount to file the petition, and (b) those qualifying claims must total, in the aggregate, at least $14,425 if unsecured or $14,425 more than the value of any liens securing those claims if any are secured.

If the company has fewer than 12 creditors, it only takes one qualifying creditor to file an involuntary petition.

Additional creditors can join the petition later, and if only one creditor files and it turns out that the company has more than 12 creditors, the bankruptcy court will give other creditors an opportunity to join.

The $14,425 amount is adjusted every three years, with the next adjustment due in April 2013.” (Eisenbach, 2012)

If the business objects to the involuntary filing, it must “generally not be paying its debts as they become due unless those debts are subject to bona fide dispute as to liability or amount, or have had a custodian appointed within the past 120 days to take possession or control of substantially all of its assets.” (Eisenbach, 2012)

The bankruptcy court may deny an involuntary petition, or the company can contest the petition within 21 days after being served the summons by filing a motion to dismiss. If the involuntary bankruptcy petition fails, the petitioning creditors can be held responsible for costs and attorney fees. Additionally, if filed in bad faith, the creditors can be held liable for damages.

- Illustrate hypothetical calculations that would be done to help creditors understand how much money they might receive if the company were to liquidate. Ensure all information is entered accurately. Please refer to the illustration (Exhibit 13.2) on page 592 from your textbook to view potential calculations.

Please see Appendix C

II. Corporation:

B. What interim reporting requirements would the company have as a corporation? Describe the guidance related to interim financial statements under GAAP and IFRS.

As a publicly traded corporation the company would be required to file interim reports, typically on a quarterly basis, with the SEC to provide information to investors and creditors in a timely manner. The statements filed include the balance sheet; income statement; and statement of cash flows. FASB ASC Topic 270 provides guidance as to how to prepare interim reports. (Hoyle)

FASB ASC Topic 270 states the same principles apply to interim reports as they do for annual financial statements. Additionally, interim periods should be treated as integral rather than discrete accounting periods. There are minimum disclosure requirements for interim reports and they impact sales; income taxes; extraordinary items; net income; comprehensive income; seasonal revenues and expenses; changes in financial position; contingencies; changes in accounting principles; changes in accounting estimates; and segment information. (US GAAP, Topic 270)

International Accounting Standards (IAS) 34 also details the minimum components of an interim financial report. They are condensed statements of financial position, comprehensive income, and changes in equity, cash flows and selected explanatory notes. Interim financial statements are prepared using the same policies as applied in annual statements. (IAS 34)

C. Generate a hypothetical financial statement illustrating what that interim reporting entails. Ensure all information is entered accurately.

See Appendix D for illustration

D. Determine if the interim reporting requirements are the same under GAAP and IFRS. Provide an example to support your response.

Both U.S. GAAP and IFRS permit condensed interim reports and reduced disclosure requirements. Additionally, income taxes are calculated using an estimated annual effective rate.

ASC Topic 270 allows the allocation of certain costs that benefit more than one period. IAS 34 only allows the allocation if it meets the definition of an asset at the end of the interim period. Moreover, a liability for accrued expenses must result in an existing obligation at the end of the interim period. (Hoyle)

Please see Appendix E for illustration

E. The company also heard that they may have to report some of their business segments separately if they opt to incorporate.

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