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 Interest Payable Notes Payable, 10%, unsecured Preferred Stock Common Stock, $5 par Retained Earnings (deficit) $160,800 20,400 341,400 101,300 150,400 (79,500) $694,800 Total 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) 540,400 will be paid in cash, (b) $21,500 will be eliminated, and (c) the remaining $98,900 will be exchanged for a four-year, secured note payable paying 12 percent interest. 2. The interest payable will be restructured as follows: elimination of $10,200 of the interest and payment of the remaining $10,200 in cash 3. The 10 percent, unsecured notes payable will be restructured as follows: (a) $61,400 of them will be eliminated, (b) $10,200 of them will be paid in cash, ( $242,500 of them will be exchanged for a 4-year 12 percent secured note, and (d) the remaining $27,300 will be exchanged for 2,730 shares of newly issued common stock having a par value of $10 4. The preferred shareholders will exchange their stock for 5,160 shares of newly issued $10 par common stock. 5. The common shareholders will exchange their stock for 2,040 shares of newly issued $10 par common stock. After extensive analysis, the company's reorganization value is determined to be $511,700 prior to any payments of cash required by the reorganization plan. An additional $10,200 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 (postpetition) Notes payable, 12%, secured Common stock ($10 par) $ 10,200 341,400 99,300 Postreorganization capital structure $450,900 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 Cash Accounts receivable (net) Inventory Property, plant & equipment (net) Book Value $ 30,800 142,000 25,400 446,000 Fair Value S 30,800 111,500 19,700 262,800 Total $644,200 $424,800

Answer 1