40.(40 Minutes) (Prepare journal entries for company emerging from bankruptcy
using fresh start accounting)
Preliminary computations:
BOOK VALUES PRIOR TO EMERGING FROM REORGANIZATION
— Total assets at book value = $710,000 ($100,000 + $112,000 + $420,000 +
$78,000)
BOOK VALUES AFTER EMERGING FROM REORGANIZATION
— Total assets = $780,000 (reorganization value)
— Total liabilities = $340,000 ($5,000 + $4,000 + $100,000 + $50,000 + $71,000 +
$110,000)
— Total common stock = $240,000 (all 18,000 returned shares are reissued)
— Deficit = -0- (eliminated by the reorganization)
have a fair value of only $735,000, goodwill of $45,000 must be recognized
JOURNAL ENTRIES
— Land and Buildings ……………………….…………….….…. 80,000
Goodwill ………..………….…………..…..….…..….….….…... 45,000
Accounts Receivable ………….…………..…………….. 20,000
To adjust accounts to fair value as part of fresh
start accounting.
— Common Stock ………….………….………………..…..….…. 144,000
Additional Paid-In Capital ……………..….….….….… 144,000
40.(continued)
— Accounts Payable ………………………..….….….….…..…. 80,000
Note Payable ……….………….…..….….….…..….….…. 5,000
Common Stock ($8 per share par value) …….….. 8,000
Additional Paid-In Capital ($6.66 per share—see
To record settlement of accrued expenses.
— Note Payable ………….…………..………….………….…..…. 200,000
Note Payable ……….………….…..….….….…..….….…. 50,000
Common Stock ($8 per share par value) …….….. 80,000
Additional Paid-In Capital ($6.66 per share—see
Additional Paid-In Capital ($6.66 per share—see
above, or 7/30 of company total) ..….….......... 46,667
Gain on Debt Discharge ………………………..….…... 11,333
To record settlement of note payable due in 2016.
— Note Payable ………….…………..………….………….…..…. 200,000
Note Payable ……….………….…..….….….…..….….…. 110,000
Gain on Debt Discharge ………………………..….…... 90,000
To record settlement of note payable due in 2017.
41.(25 Minutes) (Prepare a balance sheet for a company emerging from
bankruptcy reorganization)
a. Smith Corporation must apply fresh start accounting because it meets both
requirements established by FASB:
The reorganization value of $800,000 of the company is less than the
b. Because the company has a reorganization value of $800,000 but only
$653,000 can be assigned to specific assets based on fair value, the remaining
$147,000 is reported as Goodwill.
SMITH CORPORATION
Balance Sheet
December 31, 2015
ASSETS
Current Assets:
Accounts receivable ………….………….…..….….….….… $ 18,000
Inventory ………..…………..………….……..….….….….….... 111,000 $129,000
Land, Buildings, and Equipment:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable …………..………….…………..………….. $ 97,000
Long-term Liabilities:
Note payable (due in 2 years) ……….….…..….….….…. $ 35,000
Note payable (due in 5 years) ……….….…..….….….…. 50,000
Note payable (due in 8 years) ……….….…..….….….…. 100,000 185,000
Total Liabilities …………..…………..………..….….….… $282,000
Stockholders’ Equity:
42.(15 Minutes) (Distribution of assets as a result of liquidation)
Free assets: (liquidation value)
Other assets …………………….…………..………….……..…. $ 81,000
Unsecured debts:
Accounts payable……………………….…………..………….. $283,000
Partially secured liabilities in excess of pledged assets
Percentage of unsecured debts to be paid: $90,000/$360,000 = 25%
— Liabilities with priority collect the entire amount of $36,000
43.(35 Minutes) (Prepare statement of financial affairs)
LIMESTONE COMPANY
Statement of Financial Affairs
June 3, 2015
Available for
Book Unsecured
Values Assets Creditors
Pledged with Fully Secured Creditors:
Pledged with Partially Secured Creditors:
180,000 Equipment $130,000
Notes payable—current (250,000) -0-
Free Assets:
with priority and unsecured creditors...... $229,000
Less: Liabilities with priority
(listed below)……………………………….….…... (42 ,000)
Available for unsecured creditors …….…....... $187,000
43. (continued)
Unsecured—
Book Nonpriority
Values Liabilities and Stockholders’ Equity Liabilities
Liabilities with Priority:
Administrative expenses …………….….….$ 18,000
$ 10,000 Salaries payable …………….….….….….….... 10,000
Fully Secured Creditors:
190,000 Notes payable – long-term …….….….…....$190,000
Less: Land and buildings ……………………(310 ,000)
-0-
Partially Secured Creditors:
$120,000
Unsecured Creditors:
88,000 Accounts payable (other than salaries) 88,000
198,000 Stockholders’ equity………………….….…..….….. – 0 –
$736,000 $208,000
44.(25 Minutes) (Distribution of assets as a result of liquidation)
Free Assets:
Cash ……..………….…………..………….…………..………….…………..……... $ 6,000
Accounts Receivable ……………………..………….…………..….….….….. 18,000
Liabilities with Priority:
Administrative Expenses (estimated) ……………………………….….… $ 22,000
Salaries Payable ……………………..………….…………..…………………….. 6,000
Free Assets after Payment of Liabilities With Priority
($70,000 – $38,000) ………..…………..………….…………..………………… $ 32,000
Unsecured Liabilities:
Notes Payable (in excess of value of buildings) .…………..………… $ 10,000
Percentage of Unsecured Liabilities to Be Paid: $32,000/$160,000 = 20%
Payment on the $65,000 of notes payable secured by land will be made in total
since the value of the land is greater than the debt.
Payment on Notes Payable (secured by buildings):
Value of Security (building) ………………..………….………………….….….… $ 68,000
Total Collected by holders ……………..…………..…..….….…..….….….. $ 70,000
Payment on Bonds Payable:
Value of Security (equipment) …………………………..………….………..…... $ 35,000
Payment on Accounts Payable (unsecured):
20% of $70,000 ……………………….…………..………….…………..……………… $ 14,000
Payment of Salaries Payable:
As a liability with priority, the entire amount due is paid. $ 6,000
Payment of Taxes Payable:
45.(20 Minutes) (Reporting of a reorganization and a liquidation)
a. Because the land’s net realizable value is less than the amount of the secured
note payable, the debt will be reported on a statement of financial affairs as a
The land is still reported as an asset, one pledged with partially secured
creditors. The $31,000 cost is revealed within the statement of financial affairs
b. Fresh start accounting must be used because the reorganization value is less
than the debts and the original owners are left with less than 50 percent of the
voting stock.
After reorganization, the assets will be reported at $82,000 with one $5,000
— Land …………………………..………….…………..…………..… 17,000
Additional Paid-In capital …………….………………... 31,000
To adjust asset values to fair market value (a
total of $73,000) with a Goodwill asset
established to bring the total up to $82,000
reorganization value.
— Accounts Payable ………………………..….….….….…..…. 20,000
Note Payable ……….………….…..….….….…..….….…. 5,000
Gain on Discharge of Debt ……………..……………… 15,000
45. (continued)
— Gain on Discharge of Debt ……………..………..….….…. 72,800
Additional Paid-In Capital …………….…………..………… 16,200
Retained Earnings (deficit) …………….….….….…... 89,000
start accounting.
c. The bank will collect a total of $59,000. Obviously, the $50,000 proceeds
generated by the land sale must go to the bank with the remaining $30,000
obligation then being ranked as an unsecured-nonpriority liability. Anteium