Question

Jacobi Supply Company recently ran into certain financial difficulties that have resulted in the initiation of voluntary settlement procedures. The firm currently has $150,000 in outstanding debts and approximately $75,000 in liquidatable short-term assets. Each creditor will be paid 50 cents on the dollar immediately, and the debts will be considered fully satisfied. Indicate whether the plan is an extension, a composition, or a combination of the two. Indicate the cash payments and timing of the payments required of the firm under the plan.

Answer 1

Jacobi Supply Company's financial restructuring plan is a composition where creditors accept half of their owed amount as full settlement with cash payments totaling $75,000 made immediately.

Step-by-step explanation:

The financial restructuring described in the question involves Jacobi Supply Company proposing a plan to deal with its financial difficulties. Given the company has $150,000 in outstanding debts and approximately $75,000 in short-term assets which can be liquidated, the plan put forward is a composition. In a composition, creditors agree to accept a partial payment less than the full amount of the debts owed, in this case, 50 cents on the dollar, with the understanding that the reduced payment satisfies the debts in full. Under the terms of this plan, the company would immediately make cash payments totaling $75,000, as this is half of the outstanding debt and equals the available short-term assets. No extension, meaning no delay or rescheduling of payments, is part of this plan - payment is immediate.

Answer 2

Answer: Composition

Step-by-step explanation:

The company owes $150,000 and would pay $0.50 on every dollar immediately.

The cash payment required of the company would therefore be:

= Amount of debt in $ - Amount to be paid per dollar.

= 150,000 * 0.5

= $75,000

Timing of payment is immediately.

A composition refers to an agreement between a debt and its creditors that would allow it to pay off part of its debt in lieu of the total value. This is usually done when the debt risks being insolvent or bankrupt but can still pay off part of its debt.

The agreement would enable it pay off some of the debt and the entire debt would be written off. The benefit to the debtor is that they avoid bankruptcy and the benefit to the creditor is that they get more than they would have gotten had bankruptcy been declared.

A composition is what happened here as a part of debt was paid to satisfy the full thing.