During the recent recession, Polydorous Inc. accumulated a deficit in retained earnings. Although still operating at a loss, the company posted better results during 20X1.
During the recent recession, Polydorous Inc. accumulated a deficit in retained earnings. Although still operating at a loss, the company posted better results during 20X1. Polydorous is having trouble paying suppliers on time and is paying interest when it is due. The company files for protection under Chapter 11 of the Bankruptcy Code and has the following liabilities and stockholders equity accounts at the time the petition is filed:
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| Accounts Payable | | $ | 161,600 | | |
| Interest Payable | | | 21,800 | | |
| Notes Payable, 10%, unsecured | | | 341,600 | | |
| Preferred Stock | | | 100,700 | | |
| Common Stock, $5 par | | | 151,400 | | |
| Retained Earnings (deficit) | | | (80,600 | ) | |
| Total | | $ | 696,500 | | |
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A plan of reorganization is filed with the court, which approves it after review and obtaining creditor and investor votes. The plan of reorganization includes the following actions:
- The prepetition accounts payable will be restructured according to the following: (a) $40,600 will be paid in cash, (b) $21,400 will be eliminated, and (c) the remaining $99,600 will be exchanged for a six-year, secured note payable paying 12 percent interest.
- The interest payable will be restructured as follows: elimination of $10,900 of the interest and payment of the remaining $10,900 in cash.
- The 10 percent, unsecured notes payable will be restructured as follows: (a) $61,300 of them will be eliminated, (b) $10,900 of them will be paid in cash, (c) $242,000 of them will be exchanged for a 6-year, 12 percent secured note, and (d) the remaining $27,400 will be exchanged for 2,740 shares of newly issued common stock having a par value of $10.
- The preferred shareholders will exchange their stock for 5,160 shares of newly issued $10 par common stock.
- The common shareholders will exchange their stock for 2,200 shares of newly issued $10 par common stock.
After extensive analysis, the companys reorganization value is determined to be $515,200 prior to any payments of cash required by the reorganization plan. An additional $10,200 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:
| | |
| Current liabilities (postpetition) | $ | 10,200 | |
| Notes payable, 12%, secured | | 341,600 | |
| Common stock ($10 par) | | 101,000 | |
| Postreorganization capital structure | $ | 452,800 | |
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An evaluation of the assets fair values was made after the company completed its reorganization, immediately prior to the point the company emerged from the proceedings. The following information is available:
| | Book Value | | Fair Value |
| Cash | $ | 31,200 | | | $ | 31,200 | |
| Accounts receivable (net) | | 141,300 | | | | 111,800 | |
| Inventory | | 25,200 | | | | 19,800 | |
| Property, plant & equipment (net) | | 446,600 | | | | 263,900 | |
| Total | $ | 644,300 | | | $ | 426,700 | |
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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 plans approval day are $535,200, which is $525,000 from prepetition payables plus $10,200 in additional accounts payable incurred postpetition.) (Round your percentage answers to nearest whole percentage. Negative amounts should be indicated by a minus sign.)
Plan of Reorganization Recovery Analysis Recovery 12% Secured Common Stock Elimination Total Recovery Surviving Cash Pre- of Debt Notes % Value Debt Confirmation and Equity Post-petition liabilities Claims/Interest: 10,200 (10,200 (10,200%) 1000 Accounts (40.600(99,.600 (10,900 (10,900(242,000 2 (161.600214 2180010,900 (140.2008 ayable Interest ayable Notes payable, 10% 661,30 8 (525,000 (100,700)X (151,400)X 80,600 Total 93,600 49,10 129,400 (80,600 191,500 (10,200) (62,400) (341,600) 100 (73,600) (224,000) Preferred shareholders Commorn shareholders Retained earnings deficit Total (51,60(51,600 (22,000 (22.000e b. Prepare an analysis showing whether the company qualifies for fresh start accounting as it emerges from the reorganization based on the reorganization value of its assets and postpetition liabilities& allowed claims Answer is complete and correct. First condition Post-petition liabilities $ 10,20 Liabilities deferred pursuant to Chapter Total post-petition liabilities and Reorganization value 11 proceedings allowed claims 535,200 515,20 Excess of liabilities over reorganization $ 20,000 value c. Prepare journal entries for execution of the plan of reorganization with its general restructuring of debt and capital. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) Answer is not complete. General Journal No Event Debit Credit 525,00 Liabilities subject to compromise Cash 341,80 Notes payable Common stock (new) Gain on debt discharge 93,80 100,70 151,40 2 Preferred stock Common stock (old) Common stock (new) Additional paid-in capital Reorgan. value in excess of amts alloc. to ident. assets Gain on debt discharge Additional paid-in capital Accounts receivable (net) Inventory Property, plant and equipment 93,60 Retained earnings - deficit 80,60 d. Prepare the balance sheet for the company on completion of the plan of reorganization. For retained earnings enter the net change in Fresh Start. (Amounts to be debited should be entered as positive and amounts to be credited should be entered as negative.) Answer is not complete. Adjustments to Record Confirmation of Plan Company's Reorganized Balance Sheet Debt Pre- Fresh Start Exchange confirmation Discharge of Stock Assets Cash Accounts receivable (net) Inventory Total $ 31,2 31,200 $ 31,200 $ 0 S 0 S 31,200 Property, plant and equipment (net) Reorganization value in excess of amounts allocable to identifiable assets Total assets Liabilities Liabilities not subject to compromise Current liabilities Liabilities subject to compromise Notes Payable, 12%, secured Total Liabilities Shareholders' equity: Preferred stock Common stock (old) Common stock (new) Additional paid-in capital Retained earnings Total shareholders' equity Total liabilities and shareholders' equity 31,200 31,200 S 0 $151,2 $ 151,200 151,200 151,20 0 302,400 0 S 302,400 302,400 $302,400 S 0 0 Plan of Reorganization Recovery Analysis Recovery 12% Secured Common Stock Elimination Total Recovery Surviving Cash Pre- of Debt Notes % Value Debt Confirmation and Equity Post-petition liabilities Claims/Interest: 10,200 (10,200 (10,200%) 1000 Accounts (40.600(99,.600 (10,900 (10,900(242,000 2 (161.600214 2180010,900 (140.2008 ayable Interest ayable Notes payable, 10% 661,30 8 (525,000 (100,700)X (151,400)X 80,600 Total 93,600 49,10 129,400 (80,600 191,500 (10,200) (62,400) (341,600) 100 (73,600) (224,000) Preferred shareholders Commorn shareholders Retained earnings deficit Total (51,60(51,600 (22,000 (22.000e b. Prepare an analysis showing whether the company qualifies for fresh start accounting as it emerges from the reorganization based on the reorganization value of its assets and postpetition liabilities& allowed claims Answer is complete and correct. First condition Post-petition liabilities $ 10,20 Liabilities deferred pursuant to Chapter Total post-petition liabilities and Reorganization value 11 proceedings allowed claims 535,200 515,20 Excess of liabilities over reorganization $ 20,000 value c. Prepare journal entries for execution of the plan of reorganization with its general restructuring of debt and capital. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) Answer is not complete. General Journal No Event Debit Credit 525,00 Liabilities subject to compromise Cash 341,80 Notes payable Common stock (new) Gain on debt discharge 93,80 100,70 151,40 2 Preferred stock Common stock (old) Common stock (new) Additional paid-in capital Reorgan. value in excess of amts alloc. to ident. assets Gain on debt discharge Additional paid-in capital Accounts receivable (net) Inventory Property, plant and equipment 93,60 Retained earnings - deficit 80,60 d. Prepare the balance sheet for the company on completion of the plan of reorganization. For retained earnings enter the net change in Fresh Start. (Amounts to be debited should be entered as positive and amounts to be credited should be entered as negative.) Answer is not complete. Adjustments to Record Confirmation of Plan Company's Reorganized Balance Sheet Debt Pre- Fresh Start Exchange confirmation Discharge of Stock Assets Cash Accounts receivable (net) Inventory Total $ 31,2 31,200 $ 31,200 $ 0 S 0 S 31,200 Property, plant and equipment (net) Reorganization value in excess of amounts allocable to identifiable assets Total assets Liabilities Liabilities not subject to compromise Current liabilities Liabilities subject to compromise Notes Payable, 12%, secured Total Liabilities Shareholders' equity: Preferred stock Common stock (old) Common stock (new) Additional paid-in capital Retained earnings Total shareholders' equity Total liabilities and shareholders' equity 31,200 31,200 S 0 $151,2 $ 151,200 151,200 151,20 0 302,400 0 S 302,400 302,400 $302,400 S 0 0
