Question

Smith Corporation has gone through bankruptcy and is ready to emerge as a reorganized entity on December 31, 2020. On this date, the company has the following assets (fair value is based on discounting the anticipated future cash flows): Book Value Fair Value Accounts receivable $ 21,300 $ 19,300 Inventory 154,000 122,000 Land and buildings 277,000 305,000 Machinery 127,700 104,700 Patents 109,000 134,000 The company has a reorganization value of $847,000. Smith has 52,500 shares of $10 par value common stock outstanding. A deficit Retained Earnings balance of $687,000 also is reported. The owners will distribute 34,000 shares of this stock as part of the reorganization plan. The company’s liabilities will be settled as follows: • Accounts payable of $190,000 (existing at the date on which the order for relief was granted) will be settled with an 8 percent, two-year note for $36,800. • Accounts payable of $97,000 (incurred since the date on which the order for relief was granted) will be paid in the regular course of business. • Note payable—First Metropolitan Bank of $212,000 will be settled with an 8 percent, five-year note for $51,600 and 17,000 shares of the stock contributed by the owners. • Note payable—Northwestern Bank of Tulsa of $352,000 will be settled with a 7 percent, eight-year note for $115,000 and 17,000 shares of the stock contributed by the owners. Prepare a balance sheet for Smith Corporation upon its emergence from reorganization.

Answer 1

The balance sheet for Smith Corporation post-reorganization will reflect new asset valuations based on fair value, the resolution of liabilities with notes payable and stock distribution, and an equity adjustment to remove the deficit in Retained Earnings, incorporating the reorganization value.Equity: Common Stock $525,000 Assets: Accounts Receivable $19,300, Inventory $122,000, Land and Buildings $305,000, Machinery $104,700, Patents $134,000Liabilities: Note Payable (Accounts Payable converted to note) $36,800, Note Payable to First Metropolitan Bank (partially settled) $51,600, Note Payable to Northwestern Bank of Tulsa (partially settled) $115,000, and remaining Accounts Payable $97,000

Step-by-step explanation:

Balance Sheet Preparation for Smith Corporation Post-Reorganization

To prepare the balance sheet for Smith Corporation upon emergence from reorganization, we must take into account the changes in the company's assets and liabilities as well as the new stock distribution. The reorganization plan will modify the company's equity and liabilities accordingly:

The liabilities are resolved with new notes payable and the distribution of existing stock to the creditors.

The value of the company's assets is adjusted to reflect the fair value as of emergence rather than the book value.

The reorganization value of $847,000 will become the new equity of the company.

The new balance sheet would be structured as follows:

Assets: Accounts Receivable $19,300, Inventory $122,000, Land and Buildings $305,000, Machinery $104,700, Patents $134,000

Liabilities: Note Payable (Accounts Payable converted to note) $36,800, Note Payable to First Metropolitan Bank (partially settled) $51,600, Note Payable to Northwestern Bank of Tulsa (partially settled) $115,000, and remaining Accounts Payable $97,000

Equity: Common Stock $525,000 (52,500 shares at $10 par value each, adjusted for the distribution of an additional 34,000 shares to creditors), and Retained Earnings will be adjusted to remove the deficit and reflect the reorganization value.

The company's equity is essentially reset as a result of the reorganization, with the deficit in Retained Earnings being removed and replaced by the reorganization value minus the par value of the common stock and the new shares issued to creditors.