Question

The Labrador Company is exiting bankruptcy reorganization with the following accounts:

	Book Value	Fair Value
Receivables	$80,000	$90,000
Inventory	200,000	210,000
Buildings	300,000	400,000
Liabilities	300,000	300,000
Common Stock	330,000
Additional paid-in capital	20,000
Retained Earnings (deficit)	(70,000)

The company’s assets have a $760,000 reorganization value. As part of the reorganization, the company’s owners transferred 80 percent of the outstanding stock to the creditors.

Prepare the journal entry that is necessary to adjust the company’s record to fresh start accounting.

Answer 1

Account Titles and Explanation	Debit (in $)	Credit (in $)
Receivables	$10,000
Inventory	$10,000
Buildings	$100,000
Goodwill	$60,000
Retained Earnings    - Bal. Fig.		$70,000
Additional Paid-In Capital		$110,000
(To record the Adjustment Entry)
Workings: Goodwill   = Reorganization value (-) Fair value of assets                      =     $760,000 (-) $90,000 (-) $210,000 (-) $400,000                      =      $60,000 Value of Assets   = Fair value (-) Book value Receivables           =   $90,000 (-) $80,000    = $10,000 Inventory                =   $210,000 (-) $200,000 = $10,000 Buildings                 =   $400,000 (-) $300,000   = $100,000 Additional Paid-In Capital        = Reorganization value (-) Liabilities (-) Connon Stock                                                    (-) Balance of Additional Capital        =   $760,000 (-) $ 300,000 (-) $330,000 (-) $20,000      =   $110,000