Question

On September 30, 2011, SRP Company filed a petition for reorganization with a bankruptcy court. The plan was approved by the court and all parties of interest on January 2, 2012, when SRP Company’s balance sheet was as follows:


The terms of the reorganization plan are as follows:
1. Creditors represented by $69,000 of the unsecured accounts payable agree to accept the accounts receivable of SRP Company in full settlement of their claims. The fair value of the receivables is $51,000.
2. Creditors represented by $54,000 of the unsecured accounts payable agree to accept a patent with a book value of $42,000 and a fair value of $50,000 in full settlement of their claims.
3. Creditors of the remaining unsecured accounts payable agree to accept $.60 on the dollar. Cash is paid to these creditors and to the creditors with priority.
4. The creditor holding the 12%, $57,000 note (on which there is $6,000 accrued interest) agreed to extend the due date for two years from January 3, 2012, and to reduce the interest rate to 6% on the current carrying value of the debt ($63,000), payable annually.
5. The holder of the 10%, $54,400 unsecured note (on which there is $11,900 accrued interest) agreed to cancel the accrued interest and $14,400 of the principal; interest on the new note at 10% is due annually, with the principal due on January 3, 2015.
6. The holder of the 9%, $80,000 mortgage note (on which there is $20,500 accrued interest) agreed to accept 100,000 shares of common stock in exchange for full satisfaction of the debt. The common stock has a fair value of $.59 per share.
7. The par value of the common stock is reduced to $.10 per share and any remaining accumulated deficit is eliminated.

Required:
A. Prepare journal entries to give effect to the reorganization.
B. Prepare a post-reorganization balance sheet dated January 2, 2012.
C. Prepare journal entries to accrue interest on December 31, 2012, and to record the payment of interest on January 2,2013.


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  • CreatedMarch 13, 2015
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