A major defense contractor, LTV, faced with huge liabilities, sought Chapter 11 protection sev¬ eral years ago. Under Chapter 11, a company continues to operate but is protected from cred¬ itors while it tries to work out a reorganization plan. At that time the company’s management chose to accrue a $2.26 billion liability to reflect the potential cost of medical and life insur¬ ance benefits for its 118,000 current and retired employees. At the time, this charge was not required by generally accepted accounting principles. The Wall Street Journal reported that the company chose to recognize the charge because “if the company waited until after it negoti¬ ated new credit agreements and emerged from bankruptcy-law proceedings before taking the $2 billion charge, the additional liability could trigger violations of its debt covenants.”20 REQUIRED:

a. Provide the journal entry to record the $2.26 billion charge recognized by LTV.

b. Explain how taking the charge before negotiating new credit agreements could avoid vio¬ lating debt covenants.

c. It was also reported that LTV took several other significant charges while it was under bankruptcy proceedings. In addition to its concern about debt covenants, in general, why might management have chosen to take these charges at this time?