Advanced Accounting
Emerging from Reorganization Salem-Winston Corporation is emerging from reorganization proceedings under Chapter 11 of the bankruptcy laws. The company's balance sheet shows total assets of $4,000,000, liabilities subject to compromise of $3,800,000, and postpetition liabilities of $900,000. For purposes of determining reorganization value, Salem-Winston has the following: Excess cash (accumulated because no payments were made on prepetition debt during the reorganization period) $500,000 Net realizable value of excess assets available for disposition (book value is $120,000) 100,000 Present value of future operating cash flows of the emerging entity 2,800,000 Total $3,400,000 The new capital structure of Salem-Winston will be as follows: Postpetition liabilities. $ 900,000 Senior secured debt (5%, 15-year maturity) 1,600,000 Subordinated debt (7%, 8-year maturity) 350,000 Common stock 50,000 Total $2,900,000 The creditors represented in the amount of liabilities subject to compromise receive an immediate cash payment of $500,000 (the excess cash), all of the new debt securities, and 60 percent of the new common stock. The existing equity holders receive 40 percent of the new common stock. Required 0 0 0 0 0 0 0 0 0 0 Required b. Prepare journal entries to record Salem-Winston's emergence from reorganization. General Journal Description Debit Credit Liabilities subject to compromise 0 0 Cash Senior secured debt Subordinated debt Common stock Gain on discharge of debt To record settlement of prepetition liabilities. Shareholders' equity Common stock To record creation of new equity interests. Shareholders' equity Total assets To write down excess assets to estimated realizable value. Gain on discharge of debt Total assets Shareholders' equity To adjust asset values to reorganization value and eliminate deficit. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 $ 0 c. Present Salem-Winston's post-reorganization balance sheet. Salem-Winston Balance Sheet Total assets Postpetition liabilities $ 0 Senior secured debt Subordinated debt Common stock Total liabilities and equity $ $ 0 0 0 0 Emerging from Reorganization Salem-Winston Corporation is emerging from reorganization proceedings under Chapter 11 of the bankruptcy laws. The company's balance sheet shows total assets of $4,000,000, liabilities subject to compromise of $3,800,000, and postpetition liabilities of $900,000. For purposes of determining reorganization value, Salem-Winston has the following: Excess cash (accumulated because no payments were made on prepetition debt during the reorganization period) $500,000 Net realizable value of excess assets available for disposition (book value is $120,000) 100,000 Present value of future operating cash flows of the emerging entity 2,800,000 Total $3,400,000 The new capital structure of Salem-Winston will be as follows: Postpetition liabilities. $ 900,000 Senior secured debt (5%, 15-year maturity) 1,600,000 Subordinated debt (7%, 8-year maturity) 350,000 Common stock 50,000 Total $2,900,000 The creditors represented in the amount of liabilities subject to compromise receive an immediate cash payment of $500,000 (the excess cash), all of the new debt securities, and 60 percent of the new common stock. The existing equity holders receive 40 percent of the new common stock. Required 0 0 0 0 0 0 0 0 0 0 Required b. Prepare journal entries to record Salem-Winston's emergence from reorganization. General Journal Description Debit Credit Liabilities subject to compromise 0 0 Cash Senior secured debt Subordinated debt Common stock Gain on discharge of debt To record settlement of prepetition liabilities. Shareholders' equity Common stock To record creation of new equity interests. Shareholders' equity Total assets To write down excess assets to estimated realizable value. Gain on discharge of debt Total assets Shareholders' equity To adjust asset values to reorganization value and eliminate deficit. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 $ 0 c. Present Salem-Winston's post-reorganization balance sheet. Salem-Winston Balance Sheet Total assets Postpetition liabilities $ 0 Senior secured debt Subordinated debt Common stock Total liabilities and equity $ $ 0 0 0 0
