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During the recent recession, Polydorous Incorporated accumulated a deficit in retained earnings. Although still operating at a loss, the company posted better results during 2

During the recent recession, Polydorous Incorporated 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:
Accounts Payable $ 161,600
Interest Payable 22,600
Notes Payable, 10%, unsecured 341,100
Preferred Stock 100,800
Common Stock, $5 par 151,900
Retained Earnings (deficit)(80,100)
Total $ 697,900
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) $41,600 will be paid in cash, (b) $20,700 will be eliminated, and (c) the remaining $99,300 will be exchanged for a five-year, secured note payable paying 13 percent interest.
The interest payable will be restructured as follows: elimination of $11,300 of the interest and payment of the remaining $11,300 in cash.
The 10 percent, unsecured notes payable will be restructured as follows: (a) $61,700 of them will be eliminated; (b) $11,300 of them will be paid in cash; (c) $241,800 of them will be exchanged for a 5-year, 13 percent secured note; and (d) the remaining $26,300 will be exchanged for 2,630 shares of newly issued common stock having a par value of $10.
The preferred shareholders will exchange their stock for 5,010 shares of newly issued $10 par common stock.
The common shareholders will exchange their stock for 2,180 shares of newly issued $10 par common stock.
After extensive analysis, the companys reorganization value is determined to be $514,400 prior to any payments of cash required by the reorganization plan. An additional $10,900 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) $ 10,900
Notes payable, 13%, secured 341,100
Common stock ($10 par)98,200
Postreorganization capital structure $ 450,200
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 $ 31,700 $ 31,700
Accounts receivable (net)141,500111,200
Inventory 25,10019,400
Property, plant and equipment (net)446,300263,600
Total $ 644,600 $ 425,900
Required:
Prepare a plan of reorganization recovery analysis for the liability and stockholders equity accounts of Polydorous Incorporated on the day the plan of reorganization is approved. (Hint: The liabilities on the plans approval day are $536,200, which is $525,300 from prepetition payables plus $10,900 in additional accounts payable incurred postpetition.)
Prepare an analysis showing whether the company qualifies for fresh start accounting as it emerges from the reorganization.
Prepare journal entries for execution of the plan of reorganization with its general restructuring of debt and capital.
Prepare the balance sheet for the company on completion of the plan of reorganization. For retained earnings enter the net change in Fresh Start.
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