During the recent recession. Polydorous Inc. accumulated a deficit in retained earnings. Although still operating at a loss. Polydorous posted better results during 20X1. Polydorous is having trouble paying suppliers on time and paying interest when it is due. The company files for protection under Chapter 11 of the Bankruptcy Reform Act of 1978, and has the following liabilities and stockholders' equity accounts at the time the petition is filed:

A plan of reorganization is filed with the court, and after review and obtaining creditor and investor votes, the plan is approved by the court. The plan of reorganization includes the following actions:
1. The prepetition accounts payable will be restructured according to the following:

(a) \(\$ 40.000\) will be paid in cash;

(b) \(\$ 20,000\) will be eliminated; and

(c) the remaining \(\$ 100.000\) will be exchanged for a five-year, secured note payable, paying 12 percent interest.
2. The interest payable will be restructured as follows: \(\$ 10,000\) of the interest will be eliminated, and the remaining \(\$ 10,000\) will be paid in cash.
3. The 10 percent. unsecured notes payable will be restructured as follows:

(a) \(\$ 60.000\) of the notes will be eliminated; \(

(b) \$ 10.000\) of the notes will be paid in cash;

(c) \(\$ 240,000\) of the notes will be exchanged for a five-year, 12 percent secured note; and

(d) the remaining \(\$ 30,000\) will be exchanged for 3,000 shares of newly issued common stock having a par value of \(\$ 10\).
4. The preferred shareholders will exchange their stock for 5,000 shares of newly issued \(\$ 10\) par common stock.
5. The common shareholders will exchange their stock for 2,000 shares of newly issued \(\$ 10\) par common stock.
After extensive analysis, the reorganization value of the company is determined to be \(\$ 510,000\) prior to any payments of cash required by the reorganization plan. An additional \(\$ 10,000\) 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:

An evaluation of the fair values of the assets was made after the company completed its reorganization, immediately prior to the point the company emerged from the proceedings. The following information is available:

\section*{Required}

a. Prepare a plan of reorganization recovery analysis for the liability and stockholders' equity accounts of Polydorous Inc. on the day the plan of reorganization is approved. (Hint: The liabilities on the plan's approval day are \(\$ 530,000\), which is \(\$ 520,000\) from prepetition payables plus \(\$ 10,000\) in additional accounts payable incurred postpetition.)

b. Prepare an analysis showing if the company qualifies for fresh start accounting as it emerges from the reorganization.

c. Prepare journal entries for execution of the plan of reorganization with its general restructuring of debt and capital.

d. Prepare the balance sheet for the company on completion of the plan of reorganization.

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Accounts Payable $160.000 Interest Payable 20.000 Notes Payable. 10%, unsecured 340,000 Preferred Stock 100.000 Common Stock. $5 par Retained Earnings (deficit) Total 150.000 (80,000) $690.000