Smith Corporation has gone through bankruptcy and is ready to emerge as a reorganized entity on December

Question:

Smith has gone through bankruptcy and is ready to emerge as a reorganized entity on December 31, 2013. On this date, the company has the following assets (fair value is based on discounting the anticipated future cash flows):
................................................. Book Value ............... Fair Value
Accounts receivable. . . . . . . . . . . . . . . . $ 20,000 ...................... $ 18,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . 143,000 ....................... 111,000
Land and buildings . . . . . . . . . . . . . . . . 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 of $10 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 follows:
• of $180,000 (existing at the date on which the order for relief was granted) will be settled with an 8 percent, two-year note for $35,000.
• 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 an 8 percent, five year note for $50,000 and 15,000 shares of the stock contributed by the owners.
• Note payable-Northwestern Bank of Tulsa of $350,000 will be settled with a 7 percent, eight-year note for $100,000 and 15,000 shares of the stock contributed by the owners.
a. How does Smith Corporation's accountant know that fresh start accounting must be utilized?
b. Prepare a for Smith upon its emergence from reorganization?
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