Question

1264 E 18-6) Presented below is the balance sheet for KL Motors on September 1, 2017, the date it filed for Chapter 11 reorganization.

Assets

Cash $ 10,000

Receivables, net 115,000

Inventories 200,000

Buildings and equipment 200,000

Intangible assets 600,000

Total assets $ 1,125,000

Liabilities and equity

Accounts Payable $ 300,000

Notes payable (8%), due in 2 years 100,000

Loan payable (7%), due in 18 months 500,000

Common stock 250,000

Retained earnings (deficit) (25,000)

Total liabilities and equity $ 1,125,000

Provisions of the reorganization plans are as follows:

1. Write down reported assets to reflect actual value to the company, with balances as follows: Receivables, $100,000; buildings and equipment, $150,000; inventories are fairly valued but intangibles should be written off.

2. Exchange the 8% notes for $50,000 of new debt, and 20% of the new common stock.

3. Exchange the 7% loan for $200,000 of new debt, and 40% of the new common stock.

4. Exchange the accounts payable for $75,000 of new debt, and 10% of the new common stock.

5. The existing common stock is canceled and replaced with a new common stock issue valued at $135,000. The deficit in retained earnings is to be eliminated.

Required Prepare the recovery analysis and journal entries to record the restructuring, and present KL Motors’ balance sheet immediately following the restructuring. Assets Cash $ 10,000 Receivables, net 115,000 Inventories 200,000 Buildings and equipment 200,000 Intangible assets 600,000 Total assets $ 1,125,000 Liabilities and equity Accounts Payable $ 300,000 Notes payable (8%), due in 2 years 100,000 Loan payable (7%), due in 18 months 500,000 Common stock 250,000 Retained earnings (deficit) (25,000) Total liabilities and equity $ 1,125,000

Answer 1

Reorganisation A/c (Recovery Analysis)
	Dr.		Cr.
Receivables A/c	15000	Notes payable (8%)	23000
buildings and equipment A/c	50000	Loan payable (7%)	246000
intangibles A/c	600000	Accounts Payable A/c	211500
Retained earnings (deficit)	25000	Common Stock A/c	209500
Total	690000	Total	690000

1. Journal Entries :-
Sr. No.	Account		Dr	Cr
1	Reorgaization A/c		665000
	Receivables A/c	(115000-100000)		15000
	buildings and equipment A/c	(200000-150000)		50000
	intangibles A/c	(600000-0)		600000
2	Notes payable (8%)		100000
	Notes payable (8%)			50000
	New Common Stock	(135000*20%)		27000
	Reorgaization A/c	(100000-50000-27000)		23000
3	Loan payable (7%)		500000
	Loan payable (7%)			200000
	New Common Stock	(135000*40%)		54000
	Reorgaization A/c			246000
4	Accounts Payable A/c		300000
	New Debt A/c			75000
	New Common Stock A/c	(135000*10%)		13500
	Reorgaization A/c			211500
5	Common Stock A/c		250000
	New Common Stock A/c	(135000-27000-54000-13500)		40500
	Reorgaization A/c	(250000-40500)		209500
6	Reorgaization A/c		25000
	Retained earnings (deficit)			25000

Balance Sheet
		Working	Amount
I.	LIABILITIES
1	Common Stock (New)		135000
2	Non Current liabilities
	a. Notes payable (8%)		50000
	b. Loan payable (7%)		200000
	c. New Debt		75000
3	Current liabilities
	Accounts Payable A/c		0
		TOTAL	460000
II.	ASSETS
1	Non Current assets
	a. buildings and equipment		150000
2	Current assets
	a. Inventories		200000
	b. Trade Receiable		100000
	c. Cash		10000
		TOTAL	460000