Question

Holmes Corporation has filed a voluntary petition with the bankruptcy court in hopes of reorganizing. A statement of financial affairs has been prepared for the company showing these debts: $ 20,000 72,000 Liabilities with priority Salaries payable Fully secured creditors : Notes payable (secured by land and buildings valued at $86,000) Partially secured creditors: Notes payable (secured by inventary valued at $32,000) Unsecured creditors Notes payable Accounts payable Accrued expenses 142,000 52,000 12,000 6,000 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 $142,000. Company officials have proposed the following reorganization plan: • The company's assets have a total book value of $212,000, an amount considered to be equal to fair value. The reorganization value of the assets as a whole, though, is set at $257,000. • Employees will receive a one-year note in lieu of all salaries owed. Interest will be 8 percent, a normal rate for this type of liability • The fully secured note will have all future interest dropped from a 13 percent rate, which is now unrealistic, to a 8 percent rate. • The partially secured note payable will be satisfied by signing a new 6-year $32,000 note paying 8 percent annual

Answer 1

HOLMES CORPORATION
JOURNAL ENTRIES ON ACCEPTANCE OF REORGANIZATION PLAN
Entry	Account Title and Explanation	Debit ($)	Credit ($)
1	Goodwill ( 257,000 - 212,000 )	$         45,000
	Additional Paid-In Capital		$         45,000
	( recording goodwill recognized based on re-organization value in excess of amount allocable to identifiable assets )
2	Salary Payable	$         20,000
	8% Notes Payable		$         20,000
	( recording salary accrued exchanged for notes )
3	Notes Payable (Partially Secured)	$      142,000
	Notes Payable ( 6 Years)		$         32,000
	Common Stock ( 7,000 * $5)		$         35,000
	Additional Paid-In Capital		$           8,000
	Gain on the discharge of debt (balancing figure)		$         67,000
	( recording exchange of notes payable )
4	Cash	$         48,000
	Additional Paid-In Capital		$           8,000
	Common Stock		$         40,000
	( recording 8,000 shares purchased by the investor at $6 )
5	Notes Payable	$         52,000
	Accounts Payable	$         12,000
	Accrued Expenses	$           6,000
	Cash ( [52,000 + 12,000 + 6,000]*20% )		$         14,000
	Gain on the discharge of debt (balancing figure)		$         56,000
	( recording payments of unsecured debt - 20% payments made)
6	Gain on discharge of Debt (56,000 + 67,000)	$      123,000
	Additional Paid-In Capital (balancing figure)	$         19,000
	Retained Earnings Deficit (given in question)		$      142,000
	( adjusting the additional paid-in capital to appropriate balance )

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