Question

During the recent recession, Polydorous Inc. accumulated a deficit in retained earnings. Although still operating at a loss, the company posted better results during 20X1. Polydorous is having trouble paying suppliers on time and is paying interest when it is due. The company files for protection under Chapter 11 of the Bankruptcy Code and has the following liabilities and stockholders’ equity accounts at the time the petition is filed:
Accounts Payable ....... $160,000
Interest Payable ........ 20,000
Notes Payable, 10%, unsecured . 340,000
Preferred Stock ........ 100,000
Common Stock, $5 par ..... 150,000
Retained Earnings (deficit) .... (80,000)
Total ............ $690,000

A plan of reorganization is filed with the court, which approves it after review and obtaining creditor and investor votes. The plan of reorganization includes the following actions:
1. The prepetition accounts payable will be restructured according to the following:
(a) $40,000 will be paid in cash,
(b) $20,000 will be eliminated, and
(c) The remaining $100,000 will be exchanged for a five-year, secured note payable paying 12 percent interest.
2. The interest payable will be restructured as follows: elimination of $10,000 of the interest and payment of the remaining $10,000 in cash.
3. The 10 percent, unsecured notes payable will be restructured as follows:
(a) $60,000 of them will be eliminated,
(b) $10,000 of them will be paid in cash,
(c) $240,000 of them will be exchanged for a five-year, 12 percent secured note, and
(d) The remaining $30,000 will be exchanged for 3,000 shares of newly issued common stock having a par value of $10.
4. The preferred shareholders will exchange their stock for 5,000 shares of newly issued $10 par common stock.
5. The common shareholders will exchange their stock for 2,000 shares of newly issued $10 par common stock.
After extensive analysis, the company’s reorganization value is determined to be $510,000 prior to any payments of cash required by the reorganization plan. An additional $10,000 in current liabilities have been incurred since the petition was filed. After the reorganization is completed, the capital structure of the company will be as follows:
Current liabilities (post-petition) ...... $ 10,000
Notes payable, 12%, secured ....... 340,000
Common stock ($10 par) .......... 100,000
Post-reorganization capital structure ..... $450,000

An evaluation of the assets’ fair values was made after the company completed its reorganization, immediately prior to the point the company emerged from the proceedings. The following information is available:


Required
a. Prepare a plan of reorganization recovery analysis for the liability and stockholders’ equity accounts of Polydorous Inc. on the day the plan of reorganization is approved.
b. Prepare an analysis showing whether the company qualifies for fresh start accounting as it emerges from the reorganization.
c. Prepare journal entries for execution of the plan of reorganization with its general restructuring of debt and capital.
d. Prepare the balance sheet for the company on completion of the plan ofreorganization.


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  • CreatedMay 23, 2014
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