Question
Smith Corporation has gone through bankruptcy and is ready to emerge as a reorganized entity on December 31, 2017. On this date, the company has
Smith Corporation has gone through bankruptcy and is ready to emerge as a reorganized entity on December 31, 2017. On this date, the company has the following assets (fair value is based on discounting the anticipated future cash flows):
Book Value | Fair Value | |||
Accounts receivable | $ | 23,200 | $ | 21,200 |
Inventory | 159,000 | 127,000 | ||
Land and buildings | 272,000 | 300,000 | ||
Machinery | 161,000 | 138,000 | ||
Patents | 134,000 | 159,000 | ||
The company has a reorganization value of $838,000.
Smith has 52,000 shares of $10 par value common stock outstanding. A deficit Retained Earnings balance of $699,000 also is reported. The owners will distribute 36,100 shares of this stock as part of the reorganization plan.
The companys liabilities will be settled as follows:
Accounts payable of $194,000 (existing at the date on which the order for relief was granted) will be settled with an 8 percent, two-year note for $36,400.
Accounts payable of $98,300 (incurred since the date on which the order for relief was granted) will be paid in the regular course of business.
Note payableFirst Metropolitan Bank of $215,000 will be settled with an 8 percent, five-year note for $52,100 and 18,300 shares of the stock contributed by the owners.
Note payableNorthwestern Bank of Tulsa of $375,000 will be settled with a 7 percent, eight-year note for $115,000 and 18,300 shares of the stock contributed by the owners.
b. Prepare a balance sheet for Smith Corporation upon its emergence from reorganization.
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