Background as of 2009: Lawrence Co. (Lawrence) is a nonpublic company. Lawrence has two wholly owned subsidiaries (meaning that Lawrence owns 100% of their equity). First, there is Julie Co. (Julie), a nonpublic company. Second, there is Cookies Co.(Cookies), a public entity registered with the Securities and Exchange Commission.

In 2009, Julie transferred Cookies to Lawrence. Lawrence, Julie, and Cookies each prepare stand-alone financial statements that are in accordance with U.S. GAAP.

Bankruptcy and Deconsolidation: In January 2010, Julie Co. filed a voluntary petition for reorganization under Chapter 11 of the U.S. bankruptcy code because of its inability to meet obligations as they became due. Specifically, Julie incurred significant levels of bank debt in prior years, and, because of deteriorating business conditions, was no longer able to support that level of debt.

Lawrence concluded that the bankruptcy of Julie has caused Lawrence to lose control of Julie. Lawrence therefore deconsolidated Julie from its financial statements. Lawrence cited the following to support its loss of control over Julie Co:

1. The bankruptcy court imposed a corporate governance stipulation under which Lawrence lost its ability to unilaterally remove and replace the members comprising Julies board of directors.

2.In 2011, Julie filed an action against Lawrence seeking to void the transfer of Cookies. Julie claimed the transfer of Cookies to Lawrence was a fraudulent one, and Julie sought the return of its interest in Cookies as well as any dividends it would have received on Cookies shares from the time the transfer occurred.

3. Julie terminated all of the Lawrence Co. employees that were providing Julie with management and technical assistance on operations and business matters.

Plans of Reorganization: In May 2012, the bankruptcy court held a selection meeting in which it considered four different plans of reorganization submitted by four bidders. The four bidders, who each submitted a plan of reorganization, were: Lawrence, Julie, Cookies, and Tantalus. Tantalus is a party that is unrelated to the other three bidders Lawrence, Julie, and Cookies. Julie Cos Management supported Tantaluss plan, and, in June 2012, the bankruptcy court announced Tantalus as the winning plan sponsor. The joint plan of reorganization filed by Julie and Tantalus valued Julie at approximately $563 billion.

Lawrence Re-enters the Picture: In the months immediately following the submission of the joint Tantalus/Julie plan, the enterprise value of Julie declined significantly because of external economic conditions. Tantalus therefore rescind its plan offer and sought a reduction in the value of the consideration offered for Julie. In response, the bankruptcy court reopened the bidding process and allowed Lawrence to file a competing plan and solicit acceptances thereof. In August 2013, the bankruptcy court recommended that the district court confirm Lawrences plan of reorganization and determined that such plan met all the requirements of the bankruptcy code for confirmation. Upon execution of Lawrences plan, Lawrence would receive 100 percent of the new equity interests in Reorganized Julie and would name all members of Julies new nine-member board of directors. In November 4, 2013, Lawrences plan was executed and Lawrence owned 100% of Julie.

Research Questions:

1.Lawrence Co deconsolidated Julie upon Julies filing for bankruptcy. Was this decision by Lawrence Co in accordance with GAAP? Why or why not?

2. Does Lawrences purchase of Julie while Julie is in bankruptcy qualify as a business combination? Why or why not?

3. Should Julie apply fresh-start accounting at any point during the period discussed within this case?

4. Should Lawrence push down its new basis in Julie within Julies standalone financial statements?