Chapter 13 – Accounting for Legal Reorganizations and Liquidations
13-21
Education.
39. (15 Minutes) (Prepare income statement for company going through a
bankruptcy reorganization)
ADDISON CORPORATION
Income Statement
Revenues …………………………………………………………….. $ 467,000
Costs and expenses:
Cost of goods sold …………………………………………… $ 211,000
Earnings before reorganization items and tax effects . 120,000
Reorganization items:
Loss on closing of branch ……………………………….. (109,000)
Professional fees …………………………………………….. (71,000)
Interest revenue ……………………………………………….. 32,000 (148,000)
Chapter 13 – Accounting for Legal Reorganizations and Liquidations
40. (15 Minutes) (Description of balance sheet for a company emerging from
bankruptcy reorganization)
a. FASB ASC Topic 852 (Reorganizations) states that a company that is exiting
bankruptcy is considered a new entity (so that fair values would be applicable
The first criterion is that the fair value of the assets of the emerging company
must be less than the allowed claims as of the date of the order for relief (plus
liabilities incurred during reorganization).
b. Under fresh start accounting, the assets are adjusted to current value on the
date that the company successfully emerges from bankruptcy reorganization.
c. The reorganization value in excess of the value of the identified assets and
Education.
Chapter 13 – Accounting for Legal Reorganizations and Liquidations
Education.
42. (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 +
— Since the above accounts balance, no additional paid-in capital must exist at
this time.
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 +
— Because the company will have 30,000 shares outstanding after the
reorganization, the additional paid-in capital equals $6.66 per share
($200,000/30,000)
— Because the company has a reorganization value of $780,000 but the assets
have a fair value of only $735,000, goodwill of $45,000 must be recognized
Equipment …………………………………………………… 13,000
Additional Paid-In Capital (to balance) ………….. 70,000
To adjust accounts to fair value as part of fresh
start accounting.
— Common Stock ………………………………………………… 144,000
Chapter 13 – Accounting for Legal Reorganizations and Liquidations
42. (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
Gain on Debt Discharge ……………………………….. 31,000
To record settlement of accrued expenses.
— Note Payable …………………………………………………… 200,000
Note Payable ……………………………………………….. 50,000
Common Stock ($8 per share par value) ……….. 80,000
Note Payable ……………………………………………….. 71,000
Common Stock ($8 per share par value) ……….. 56,000
Additional Paid-In Capital ($6.66 per share—see
above, or 7/30 of company total) ……………… 46,667
Gain on Debt Discharge ……………………………….. 11,333
— Additional Paid-In Capital ($334,000 – $200,000) … 134,000
Gain on Debt Discharge …………………………………… 196,000
Retained Earnings (deficit) …………………………... 330,000
To adjust additional paid-in capital to
appropriate balance, close out gain, and
Chapter 13 – Accounting for Legal Reorganizations and Liquidations
Education.
43. (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
$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, 2017
Land and buildings …………………………………………… 278,000
Machinery ………………………………………………………… 121,000 399,000
Intangible Assets:
Patents …………………………………………………………….. 125,000
Goodwill ………………………………………………………….. 147,000 272,000
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:
Chapter 13 – Accounting for Legal Reorganizations and Liquidations
13-27
Education.
44. (15 Minutes) (Distribution of assets as a result of liquidation)
Free assets: (liquidation value)
Other assets …………………………..………………………… $ 81,000
Assets pledged with fully secured creditors in
Partially secured liabilities in excess of pledged assets
($180,000 – $103,000) …………………………………… 77,000
Total unsecured debts …………………………………. $360,000
Chapter 13 – Accounting for Legal Reorganizations and Liquidations
45. (35 Minutes) (Prepare statement of financial affairs)
LIMESTONE COMPANY
Statement of Financial Affairs
June 3, 2017
Available for
Book Unsecured
Values Assets Creditors
Pledged with Fully Secured Creditors:
Free Assets:
3,000 Cash …………………………..………………………….. 3,000
65,000 Accounts receivable ……………………………….. 26,000
88,000 Inventory ………………………………………………… 80,000
Total amount available to pay liabilities
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Education.
45. (continued)
Unsecured—
Book Nonpriority
Values Liabilities and Stockholders’ Equity Liabilities
Liabilities with Priority:
Administrative expenses ……………. $ 18,000
Partially Secured Creditors:
250,000 Notes payable current ……………….. $250,000
Less: Equipment …………………………. (130,000) $120,000
Unsecured Creditors:
Chapter 13 – Accounting for Legal Reorganizations and Liquidations
13-30
Education.
46. (25 Minutes) (Distribution of assets as a result of liquidation)
Free Assets:
Cash …………………………..………………………………………………………. $ 6,000
Accounts Receivable ………………………………………………………….. 18,000
Inventory ……………………………………………………………………………. 31,000
Salaries Payable ………………………………………………………………….. 6,000
Taxes Payable ……………………………………………………………………… 10,000
Total ……………………………………………………………………………… $ 38,000
Free Assets after Payment of Liabilities with Priority
($70,000 – $38,000) …………………………..………………………………… $ 32,000
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):
20% of Remaining $80,000 ………………………………………………………… 16,000
Total Collected by holders ……………………………………………………. $ 51,000
Payment on Accounts Payable (unsecured):
20% of $70,000 …………………………………………………………………………. $ 14,000
Payment of Salaries Payable:
Chapter 13 – Accounting for Legal Reorganizations and Liquidations
47. (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
liability owed to “partially secured creditors.” The $80,000 obligation is
disclosed in this manner and then reduced by the $48,000 anticipated cash
net realizable value is reported but is offset by the $80,000 liability. Thus, no
cash will be available to unsecured creditors unless a greater amount is
generated by the sale.
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
Investments ……………………………………………………… 5,000
Goodwill ……………………………………………………….….. 9,000
Additional Paid-In capital …………………………….. 31,000
To adjust asset values to fair market value (a
total of $73,000) with a Goodwill asset
To record issuance of stock to bank in settlement of
debt.
— Accounts Payable …………………………………………….. 20,000
Note Payable ……………………………………………….. 5,000
Gain on Discharge of Debt …………………………... 15,000
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Education.
47. (continued)
— Gain on Discharge of Debt ………………………………… 72,800
Additional Paid-In Capital …………………………………. 16,200
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
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48. (25 Minutes) (Prepare statement of realization and liquidation)
a. LITZ CORPORATION
Statement of Realization and Liquidation
Stock-
Liabilities Fully Partially Unsecured holders’
Noncash with Secured Secured Nonpriority Equity
Cash Assets Priority Creditors Creditors Liabilities (Deficits)
Payment is made on note from
proceeds of auction (48,000) (48,000)
Remaining debt is reclassified (84,000) 84,000
Administrative expenses incurred $15,000 (15,000)
Land and buildings all sold 315,000 (370,000) (55,000)
Administrative expenses paid (15,000) (15,000)
Final balances remaining for
unsecured creditors $214,000 -0- $34,000 -0- -0- $200,000 $(20,000)
b. Total amount available to pay
liabilities with priority and
($180,000/$200,000) 90%
Chapter 13 – Accounting for Legal Reorganizations and Liquidations
49. (40 Minutes) (Prepare journal entries for company emerging from bankruptcy
using fresh start accounting)
Becket Corporation must use fresh start accounting because the reorganization
value of $650,000 is less than the company’s allowed debts and the original
owners hold less than 50 percent of the voting stock after the reorganization.
BOOK VALUES AFTER EMERGING FROM REORGANIZATION
— Total common stock = $160,000 (10,000 additional shares are issued with a
$10 per share par value so that total outstanding shares = 16,000)
— Deficit = -0- (eliminated by the reorganization)
JOURNAL ENTRIES
—Investments ………………………………………………………. 14,000
Land ……………………………………………………….………… 23,000
Buildings ………………………………………………………….. 52,000
Additional Paid-In Capital (to balance) ……………. 49,000
To adjust accounts to fair value as part of fresh
start accounting.
—Cash ……………………………………………………………….. 77,000
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50. (40 Minutes) (Prepare statement of financial affairs and determine amounts to
be paid in liquidation)
a. OREGON CORPORATION
Statement of Financial Affairs
Available for
Pledged with Partially Secured Creditors:
28,000 Land (Plots B and C) $25,000
Less: Notes payable (30,000) -0-
Free Assets:
6,000 Cash 6,000
Available for unsecured creditors $ 3,000
Estimated deficiency 47,000
$92,000 $50,000
Unsecured—
Book Nonpriority
Fully Secured Creditors:
30,000 Notes payable $30,000
Land (Plots A and D) (43,000) -0-
Partially Secured Creditors:
30,000 Notes payable $30,000
(25,000)* Stockholders‘ equity
$92,000 $50,000
*Derived as a balancing figure.