P2-8 (Balance sheet value and the fair market values ofthe assets) Because of consistent losses in the past several years, Eat and Run, a fast-food franchise, is in danger of bankruptcy. Its most current balance sheet follows. Assets Liabilities and Stockholders’ Equity Cash $ 25,000 Accounts payable $ 42,000 Short-term investments 15,000 Wages payable 20,000 Accounts receivable 35,000 Other short-term payables 34,000 Inventory 42,000 Long-term notes 75,000 Prepaid insurance 10,000 Mortgage payable 25,000 Property, plant, & equip. 82,000 Contributed capital 50,000 Other assets 50,000 Retained earnings Total liabilities and 13,000 Total assets $259,000 stockholders’ equity $259,000 ADDITIONAL INFORMATION: The fair market value of the marketable securities is $19,000. The sale of the accounts receivable to a local bank would produce about $25,000 cash. A portion of the inventory originally costing $21,000 is now obsolete and can be sold for $3,000 scrap value. The remaining inventory is worth approximately $30,000. 72 Part 1 An Overview of Financial Accounting Prepaid insurance is nonrefundable. In the event of bankruptcy, the property, plant, and equipment owned by Eat and Run would be divided up and sold separately. It has been estimated that these sales would bring approxi¬ mately $100,000 cash. Other assets (primarily organizational costs) cannot be recovered. REQUIRED:

a. The book value (balance sheet assets less liabilities) of Eat and Run is $63,000. Comment on why this balance sheet value may not be a good indication of the value of the com¬ pany in the case of bankruptcy.

b. If Eat and Run goes bankrupt, what would you consider the value of the company to be?

c. When a company goes bankrupt, the creditors are usually paid off first with the existing assets, and then, if assets remain, the stockholders are paid. If Eat and Run goes bankrupt, would the stockholders receive anything? If so, how much?