Question

Chapter 11 Reorganization 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 trou- ble 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 Interest Payable Notes Payable. 10%, unsecured Preferred Stock Common Stock, $5 par Retained Earnings (deficit) Total $160,000 20,000 340,000 100,000 150,000 (80,000) $690.000 A plan of reorganization is filed with the court, which approves it after review and obtaining credi- tor 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. (6) $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 S10,000 in cash. 3. The 10 percent, unsecured notes payable will be restructured as follows: (a) 560,000 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 (c) 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 Teblitos postpeton) Notes payable. 12%secured Common stock $10 por) Postreorganization capital structure $ 10,000 340,000 100,000 $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 infor mation is available:

Answer 1

Answer :
Stock Value Total $ Recovery Recovery analysis for plan of reorganization: Polydorous Corporation Plan of Reorganization Recovery Analysis Recovery Pre- Elimination 12% Confir of Debt Surviving Cash Secured Common mation and Equity Debt Notes Post-petition liabilities (10,000) (10,000) Claims/Interest: Accounts Payable (160,000 20,000 (40,000) (100,000) ) Interest Payable (20,000) 10,000 (10,000) Notes Payable, 10% (340,000 60,000 (10,000) (240,000) 30 (10,000) 100% (140,000) 88 (10,000) 50 (30,000) (280,000) 82 Total 90,000 (520,000 ) Preferred Shareholders (100,000 50,000 50 (50,000) (50,000) 130,000 20 (20,000) (20,000) Common Shareholders (150,000 ) Retained Earnings 80,000 Deficit (80,000)

Total (700,000 190,000 (10,000 (60,000) (340,000) 100% (100,000) 510,000 Pre-confirmation total equities of $700,000 includes $690,000 pre-petition and $10,000 post-petition increase. Parentheses indicate credit amount.

b. Analysis for evaluating qualifications for fresh start accounting: First condition: Post-petition liabilities Liabilities deferred pursuant to Chapter 11 proceedings Total post-petition liabilities and allowed claims Reorganization value Excess of liabilities over reorganization value $ 10,000 520,000 $530,000 (510,000) $ 20,000 Second condition: Holders of existing voting shares immediately before confirmation receive 20% of voting shares of emerging entity. Therefore, both conditions for a fresh start occur, and fresh start accounting is used to account for the company. 520,000 C. Entries for execution of plan of reorganization: (1) Liabilities Subject to Compromise Cash Notes Payable, 12%, secured Common Stock (new) Gain on Debt Discharge Record debt discharge. 60,000 340,000 30,000 90,000 100,000 150,000 (2) Preferred Stock Common Stock (old) Common Stock (new) Additional Paid-In Capital Record exchange of stock for stock. 70,000 180,000

30,000 90,000 180,000 (3) Reorganization Value in Excess of Amounts Allocable to identifiable Assets Gain on Debt Discharge Additional Paid-In Capital Accounts Receivable (net) Inventory Property, Plant, and Equipment Retained Earnings - Deficit Record fresh start accounting and eliminate deficit. 30,000 7,000 183,000 80,000 Schedule to support allocation of reorganization value: Book Value Value Fair Difference $ 30,000 140,000 25,000 $ 30,000 $ -0- 110,000 (30,000) 18,000 (7,000) Cash Accounts Receivable (net) Inventory Property, Plant, and Equipment (net) Reorganization Value in Excess of Amounts Allocable to Identifiable Assets Total 445,000 262,000 (183,000) -0- $640,000 30,000 30,000 $450,000 $(190,000) The post-reorganization total fair value is the reorganization value of $510,000 less the $60,000 paid to fulfill the plan of reorganization d. Fresh start balance sheet workpaper for company emerging from reorganization: (Worksheet not required) 1

그 Adjustments to Record Confirmation of Pre- confir- mation Plan Company's Reorganized Balance Sheet Fresh Debt Exchange Discharge of Stock Start Assets: (60,000) 30,000 Cash Accounts Receivable (net) Inventory 90,000 140,000 25,000 255,000 (30,000) (7,000) (37,000) 110,000 18,000 (60,000) 158,000 445,000 (183,000) 262,000 Property, Plant and Equipment (net) Reorganization Value In Excess of Amounts Allocable to Identifiable Assets Total Assets 30,000 (190,000 30,000 450,000 700,000 (60,000 -0- (10,000) (10,000) Liabilities: Liabilities Not Subject to Compromise: Current Liabilities Liabilities Subject to Compromise Notes Payable, 12% secured Total Liabilities (520,000) 520,000 (340,000) (340,000 (530,000) 180,000 -0- (350,000) Shareholders' Equity Preferred Stock Common Stock (old) 100,000 (100,000) (150,000) 150,000

(30,000) (100,000) Common Stock (new) Additional Paid-in Capital Retained Earnings 80,000 (90,000) (70,000) (180,000) 180,000 90,000 (80,000) -0- 190,000 (100,000) Total Shareholders' Equity (170,000) (120,000) Total Liabilities and Shareholders' Equity (700,000) 60,000 -0- 190,000 (450,000 Parentheses indicate credit amount. d. Balance sheet for company emerging from Chapter 11 reorganization with fresh start accounting: Polydorous Company Balance Sheet Emerging Date Assets Cash $ 30,000 Accounts Receivable (net) 110,000 Inventory 18,000 Total Current Assets $158,000 262,000 Property, Plant, and Equipment (net) Reorganization Value In Excess of Amounts Allocable to identifiable Assets Total Assets 30,000 $450,000 Liabilities: Accounts Payable Notes Payable, 12%, secured Total Liabilities $ 10,000 340,000 $350,000 Shareholders' Equity

Common Stock Total Shareholders' Equity Total Liabilities and Shareholders' Equity 100,000 $100,000 $450,000