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Holmes Corporation files a voluntary petition with the bankruptcy court in hopes of reorganizing. Company officials prepare a statement of financial affairs showing these debts:

Holmes Corporation files a voluntary petition with the bankruptcy court in hopes of reorganizing. Company officials prepare a statement of financial affairs showing these debts:

Liabilities with priority:

Salaries payable

$18,000

Fully secured creditors:

Notes payable (secured by land and buildings valued at $84,000)

70,000

Partially secured creditors:

Notes payable (secured by inventory valued at $30,000)

140,000

Unsecured creditors:

Notes payable

50,000

Accounts payable

10,000

Accrued expenses

4,000

Holmes has 10,000 shares of common stock outstanding with a par value of $5 per share. In addition, the company currently reports a deficit balance of $132,000.

In hopes of emerging from Chapter 11 bankruptcy, officials propose the following reorganization plan:

The companys assets have a total book value of $210,000, an amount considered to be equal to fair value. The reorganization value of business assets as a whole is set at $225,000.

Employees will receive a one-year note in lieu of all salaries owed. Interest will be paid at a 10 percent annual rate, a normal rate for this type of liability.

Future interest on the fully secured note will drop from a 15 percent annual rate, which is now unrealistic, to a 10 percent rate.

The company will issue a new six-year $30,000 note paying 10 percent annual interest to replace the partially secured note payable. In addition, this creditor will receive 5,000 new shares of Holmess common stock.

An outside investor will buy 6,000 new shares of common stock at $6 per share.

The unsecured creditors will receive an offer of 20 cents on the dollar to settle the remaining liabilities.

Assume that all interested parties accept this plan of reorganization and it becomes effective. What journal entries will Holmes Corporation record?

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