Becket Corporation’s accountant has prepared the following balance sheet as of N
ID: 2577834 • Letter: B
Question
Becket Corporation’s accountant has prepared the following balance sheet as of November 10, 2017, the date on which the company is to release a plan for reorganizing operations under Chapter 11 of the Bankruptcy Reform Act:
Becket Corporation
balance sheet
November 10, 2017
Cash 12,000
Accounts Receivable.(net) 61,000
Investments. 26,000
inventory (net realizable value is expected to approximately 80% of cost). 80,000
land 57,000
Buildings (net). 248,000
Equipment (net). 117,000
Total assets 601,000
Liabilities and Equities
Accounts payable. 129,000
Notes payable- current (secured by equipment) 220,000
Note payable- (due in 2020)
(secured by land and buildings). 325,000
Common Stock ($10 par value). 60,000
Retained earnings (deficit). (133,000)
total liabilities and Equities. $601,000
The company presented the following proposal:
The reorganization value of the company's assets just prior to issuing additional shares below, selling the company's investment, and conveying title to the land is set at $650,000 based on discounted future cash flows.
Accounts receivable of $20,000 are written off as uncollectible. Investments are worth $40,000, land is worth $80,000, the buildings are worth $300,000, and the equipment is worth $86,000.
An outside investor has been found to buy 7,000 shares of common stock at $11 per share.
The company's investments are to be sold for $40,000 in cash with the proceeds going to the holders of the current note payable. The remainder of these short-term notes will be converted into $130,000 of notes due in 2021 and paying 10 percent annual cash interest.
All accounts payable will be exchanged for $40,000 in notes payable due in 2018 that pay 8 percent annual interest.
Title to land costing $20,000 but worth $50,000 will be transferred to the holders of the note payable due in 2020. In addition, these creditors will receive $180,000 in notes payable (paying 10 percent annual interest) coming due in 2024. These creditors also are issued 3,000 shares of previously unissued common stock. Becket retains the remainder of its land.
Prepare journal entries for Becket to record the transactions as put forth in this reorganization plan.
Explanation / Answer
Becket Corporation Balance sheet as at 10 Nov 2017 Cash 12000 Accounts Receivable 61000 Investments 26000 Inventory 80000 Land 57000 Buildings 248000 Equipment 117000 Total assets 601000 Liabilities & Equity Accounts payable 129000 Notes payable - current 220000 Note payable - due 2020 325000 Common stock ($10 par value) 60000 Retained earnings (deficit) -133000.00 Total liabilities & equity 601000 Journal entries to record re-organization Debit $ Credit $ 10-Nov-17 Reorganization Account Land 57000 Buildings 248000 Equipment 117000 Inventory 80000 Investments 26000 Accounts Receivable 61000 Accounts payable 129000 Notes payable - current 220000 Note payable - due 2020 325000 Common stock ($10 par value) 60000 Retained earnings (deficit) 133000.00 Cash 12000.00 734000 734000 Cash 12000 Accounts Receivable 41000 Investments 40000 Land 80000 Buildings 300000 Equipment 86000 Common Stock 60000 Share premium 7000 Retained earnings 133000.00 Accounts payable 129000 Notes payable - current 220000 Note payable - due 2020 325000 Loss on reorganization 49000 741000 741000 (Recording transfer of all asses and liabilities at book values to Reorganization Account and restoration at new book values) Cash 40000 Investments 40000 (Recording sale of investments) Notes payable 40000 Cash 40000 (Recording proceeds of sale of investments appplied to current note payable) Note payable - due 2020 325000 Notes payable - due - 2021 (10%) 180000 Loss on reorganization 145000 (Recording conversion of note payable) Accounbts payable 129000 Notes payable 40000 Loss on reorganization 89000 (Recording conversion ofAccounts payable)
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