Holmes Corporation has filed a voluntary petition with the bankruptcy court in hope of reorganizing. A statement

Question:

Holmes Corporation has filed a voluntary petition with the bankruptcy court in hope of reorganizing. A statement of financial affairs has been prepared for the company showing these debts:
Liabilities with priority:
Salaries payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,000
Fully secured creditors:
Notes payable (secured by land and buildings valued at $84,000) . . . . . . . 70,000
Partially secured creditors:
Notes payable (secured by inventory valued at $30,000) . . . . . . . . . . . . . . 140,000
Unsecured creditors:
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000

Holmes has 10,000 shares of common stock outstanding with a par value of $5 per share. In addition, it is currently reporting a deficit balance of $132,000.
Company officials have proposed the following reorganization plan:
• The company’s assets have a total book value of $210,000, an amount considered to be equal to fair value. The reorganization value of the assets as a whole, though, is set at $225,000.
• Employees will receive a one-year note in lieu of all salaries owed. Interest will be 10 percent, a normal rate for this type of liability.
• The fully secured note will have all future interest dropped from a 15 percent rate, which is now unrealistic, to a 10 percent rate.
• The partially secured note payable will be satisfied by signing a new six-year $30,000 note paying 10 percent annual interest. In addition, this creditor will receive 5,000 new shares of Holmes’s common stock.
• An outside investor has been enlisted to buy 6,000 new shares of common stock at $6 per share.
• The unsecured creditors will be offered 20 cents on the dollar to settle the remaining liabilities.

If this plan of reorganization is accepted and becomes effective, what journal entries would Holmes Corporation record?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...
Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Advanced Accounting

ISBN: 9781260247824

14th Edition

Authors: Joe Ben Hoyle, Thomas Schaefer, Timothy Doupnik

Question Posted: