1264 E 18-6) Presented below is the balance sheet for KL Motors on September 1,
ID: 2531192 • Letter: 1
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
Explanation / Answer
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
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
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