Smith Corporation has gone through bankruptcy and is ready to emerge as a reorga

Question

Smith Corporation has gone through bankruptcy and is ready to emerge as a reorganized entity on also the anticipated future cash flow

                                                                                            Book Value                                Fair Value

Accounts Receivable                                                    $20,000                                             $18,000

Inventory                                                                         143,000                                             111,000

Land and Building                                                          250,000                                             278,000

Machinery                                                                        144,000                                             121,000

Patents                                                                             100,000                                             125,000

The company has a reorganization value of $800,000.

Smith has 50,000 shares at $10 par value common stock outstanding. A deficit retained earnings balance of $670,000 also is reported. The owners will distribute 30,000 shares of this stock as part of the reorganization plan.

The company’s liabilities will be settled as follow:

Accounts payable of $180,000 (existing at the date on which the order for relief was granted will be settled with an 8% year note for $35,000.

Accounts payable of $97,000 incurred since the date on which the order for relief was granted will be paid in the regular course of business.

Note Payable First Metropolitan Bank of $200,000 will be settled with and 8% 5 year note for $50,000 and 15,000 share of the stock contributed by the owners.

Note payable Northwestern Bank of Tulsa of $350,000 will be settled with a 7% 8 year note for $100,000 and 15,000 shares of the stock contributed by the owners..

Prepare the Journal Entries.

                                                                                            Book Value                                Fair Value

Accounts Receivable                                                    $20,000                                             $18,000

Inventory                                                                         143,000                                             111,000

Land and Building                                                          250,000                                             278,000

Machinery                                                                        144,000                                             121,000

Patents                                                                             100,000                                             125,000

Explanation / Answer

Note: Reorganization value is coming 782000, there might be missing of some information.

Prepetition liabilities 730000 Note Payable(New) 185000 Common Stock (New) 300000 Gain on debt restructuring 245000 Loss on asset adjustments to fair values 4000 Land and Building 28,000 Patents 25,000 Accounts Receivable 2000 Inventory 32,000 Machinery 23,000 Common Stock(Old) 500000 Common Stock (New) 200000 Additional paid-in capital 300000 Gain on debt discharge 245000 Additional paid in capital 300000 Reorganization value in excess of fair value 129000 Loss on asset adjustments to fair values 4000 Deficit 670000

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