Reorganization Entries and Balance Sheet
On September 30, 2008, SRP Company filed a petition for reorganization with a bankruptcy court. The plan was approved by the court and all parties of interest on January 2, 2009, when SRP Company's balance sheet was as follows:
SRP Company Balance Sheet January 2, 2009
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Cash
|
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$32,000
|
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Accounts receivable
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$71,450
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|
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Less: allowance for uncollectibles
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16,750
|
|
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Inventories
|
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126,600
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Plant & Equipment
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322,000
|
|
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Less: Accumulated depreciation
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180,700
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141,300
|
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Land
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20,800
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Patents
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92,000
|
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Total Assets
|
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467,600
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Current liabilities
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|
|
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Accounts payable-unsecured
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|
|
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12% Notes payable-unsecured
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57,000
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Accrued Wages-with priority
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11,900
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Accured Interest payable
|
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38,400
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Total current liabilities
|
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250,000
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10% note payable-unsecured
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54,400
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9% mortgage note payable-secured by equipment
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80,000
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Stockholders' Equity
Common stock $ .50 par value, 2,500,000
Shares Authorized, $480,000 shares issued and Outstanding 240,000
Retained Earnings (deficit) (156,800)
Total Equities 467,600
The terms of the organization plan are as follows:
1. Creditors represented by $69,000 of the unsecured accounts payable agree to accepts the accounts receivable of SRP Company in full settlements of their claims. The fair value of the receivables is $51,000.
2. Creditors represented by $54,000 of the unsecured accounts payable agree to accept a patent with a book value of $42,000 and a fair value of $50,000 in full settlement of their claims.
3. Creditors of the remaining unsecured accounts payable agree to accept $.60 on the dollar. Cash is paid to these creditors and to the creditors with priority.
4. The creditors holding the 12%, $57,000 note (on which there is $11,900) accrued interest ) agreed to extend the due date for two years from January 3,2009, and to reduce the interest rate to 6% on the current carrying value of the debt ($63,000), payable annually.
5. the holder of the 10%, $54,400 unsecured note (on which these is $11,900 accured interest ) agreed to cancel the accrued interest and $14,400 of the principal; interest on the new note at 10% is due annually, with the principal due on January 3,2012.
6. the holder of the 9%, $80,000 mortgage note (on which there is $20,500 accrued interest) agreed to accept 100,000 shares of the common stock in exchange for full satisfaction of the debt. The common stock had a fair value of $.59 per share.
7. the par value of the common stock is reduced to $.10 per share and any remaining accumulated deficit is eliminated.
Required:
A. Prepare a journal entries to give effect to the reorganization.
B. Prepare a post-reorganization balance sheet dated January 2, 2009
C. Prepare journal entries to accrue interest on December 31, 2009, and to record the payment of interest on January 2, 2010