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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 sort-term assets. Indicate for each of the following plans, whether the plan is an extension, a composition, or a combination of the two. Also indicate the cash payments and timing of the payments required of the firm under each plan.
a. Each creditor will be paid 50 cents on the dollar immediately, and the debts will be fully satisfied.
b. Each creditor will be paid 80 cents on the dollar in two quarterly installments of 50 cents and 30 cents. The first installment is to be paid in 90 days.
c. Each creditor will be paid the full amount of its claim in three installments of 50 cents, 25 cents, and 25 cents on the dollar. The installments will be made in 60-day intervals, beginning in 60 days.
d. A group of creditors with claims of $50,000 will be immediately paid in full; the rest will be paid 85 cents on the dollar, payable in 90 days.

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Solution Summary

The author analyzes 4 different payment plans, debt forgiveness, and payment extension schedules for a business.

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First thing to consider is that there is no mention of interest payments. A composition payment is one that includes interest like a mortgage. With a mortgage composition payments include more interest paid in the beginning and more principal paid towards the end of the loan term. Perhaps your text book defines it in another way.

A) The USD75K of short-term assets is used to pay the creditors 50% of their USD150K debt. The ...

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