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: Accounts Payable $161,300 Interest Payable 23,000 Notes Payable, 10%, unsecured 340,300 Preferred Stock 101,100 Common Stock, $5 par 151,100 Retained Earnings (deficit) Total (79,500) $697,300 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: 1. The prepetition accounts payable will be restructured according to the following: (a) $41,600 will be paid in cash, (b) $20,500 will be eliminated, and (c) the remaining $99,200 will be exchanged for a four-year, secured note payable paying 11 percent interest. 2. The interest payable will be restructured as follows: elimination of $11,500 of the interest and payment of the remaining $11,500 in cash. 3. The 10 percent, unsecured notes payable will be restructured as follows: (a) $60,600 of them will be eliminated, (b) $11,500 of them will be paid in cash, (c) $241,100 of them will be exchanged for a 4-year, 11 percent secured note, and (d) the remaining $27,100 will be exchanged for 2,710 shares of newly issued common stock having a par value of $10. 4. The preferred shareholders will exchange their stock for 5,060 shares of newly issued $10 par common stock. 5. The common shareholders will exchange their stock for 2,050 shares of newly issued $10 par common stock. After extensive analysis, the company's reorganization value is determined to be $514,400 prior to any payments of cash required by the reorganization plan. An additional $11,300 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: After extensive analysis, the company's reorganization value is determined to be $514,400 prior to any payments of cash required by the reorganization plan. An additional $11,300 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) Notes payable, 11%, secured Common stock ($10 par) Postreorganization capital structure $ 11,300 340,300 98,200 $449,800 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 Cash Accounts receivable (net) Inventory Property, plant & equipment (net) Total Fair Value $ 30,300 $ 30,300 140,800 111,800 26,700 18,400 446,200 262,300 $644,000 $422,800 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 plan's approval day are $535,900, which is $524,600 from prepetition payables plus $11,300 in additional accounts payable incurred postpetition.) (Round your percentage answers to nearest whole percentage. Negative amounts should be indicated by a minus sign.) Answer is complete and correct. POLYDOROUS CORPORATION Plan of Reorganization Recovery Analysis Recovery Elimination 11% Secured Common Stock Total Recovery Pre- of Debt Confirmation and Equity Surviving Debt Cash Notes % Value % Post-petition liabilities Claims/Interest: (11,300) (11,300) (11,300) 100 Accounts payable (161,300) 20,500 (41,600) (99,200) (140,800) 87 Interest payable (23,000) 11,500 (11,500) ( (11,500) 50 Notes payable, 10% (340,300) 60,600 (11,500) (241,100) 28 (27,100) (279,700) 82 Total (524,600) 92,600 Preferred shareholders (101,100) 50,500 Common shareholders (151,100) 130,600 52 21 (50,600) (20,500) (50,600) (20,500) Retained earnings deficit 79,500 (79,500) Total (708,600) 194,200 (11,300) (64,600) (340,300) 101 (98,200) (514,400) 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 Liabilities deferred pursuant to Chapter 11 proceedings Total post-petition liabilities and allowed claims Reorganization value Excess of liabilities over reorganization value $ 11,300 524,600 $ 535,900 514,400 $ 21,500 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.) No A Event 1 Liabilities subject to compromise Cash Notes payable Common stock (new) Gain on debt discharge B 2 Preferred stock Common stock (old) C 3 Answer is not complete. General Journal 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 Retained earnings - deficit 0000 Debit Credit 524,600 64,600 340,300 27,100 92,600 101,100 151,100 92,600 29,000 8,300 183,900 79,500 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.) Assets: Cash Accounts receivable (net) Inventory Total 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 Answer is not complete. Adjustments to Record Confirmation of Plan Company's Pre- Debt confirmation Discharge Reorganized Exchange of Stock Fresh Start Balance Sheet $ 0 0 0 $ 0 S 0 S 0 S 0 0 0 0 S 0 0 S 0 S 0 S 0 0 0 S 0 $ 0 S 0 $ 0 $ 0 $ 0 0 0 0 0 0 0 0 0 0 $ 0 S 0 $ 0 $ 0