Reorganization and Troubled Debt Restructuring
135
CHAPTER 8
MULTIPLE CHOICE ANSWERS AND SOLUTIONS
8-1: a
Trade accounts payable (P52,000 + P62,700)
P114,700
12% preferred stock (5,000 x P1) P 5,000
Paid in capital in excess of par (5,000 x P9) 45,000
Cash (P62,700 x P0.80) _50,160
_100,160
Gain from discharge of indebtedness P
14,540
8-2: c
8-3: c
8-4: b
Carrying value of the note payable:
Principal P600,000
Interest
__60,000 P660,000
Restructured value:
Principal P400,000
Interest
_110,000 _510,000
Gain on debt restructuring
P150,000
8-5: d
Other income:
Fair value of land
P450,000
Books value of land
_360,000
Other income P
90,000
Extraordinary gain:
Book value of note payable
Principal P500,000
Interest __60,000
P560,000
Fair value of land
_450,000
Extraordinary gain
P110,000
8-6: a
Book value of bonds payable
P500,000
Par value of preferred stock (5,000 shares x P100)
_500,000
No gain no loss P
–0–
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Chapter 8
8-7: a
Book value of notes payable:
Principal P 2,500
Interest
___500 P 3,000
Par value of common stock issued (200 shares x P5)
__1,000
Additional paid in capital
P 2,000
Add gain on payment of accounts payable:
Book value P 10,000
Payment __8,000
__2,000
Total gain on debt discharge
P 4,000
8-8: a
Carrying value of debt:
Note payable P100,000
Interest payable __12,000
P112,000
Fair value machinery
_(36,000)
Balance of debt P
76,000
Restructured debt:
Note payable P 50,000
Interest (P50,000 x .08 x 2) ___8,000
__58,000
Restructuring difference (gain)
P 18,000
8-9: d
Principal
P300,000
Interest payable (300,000 x 10%)
__30,000
Carrying value
P330,000
8-10: c
Should be P310,600
Restructured principal of note payable
P260,000
Interest payable:
On book value (P300,000 x 10% 30%) P 9,000
On restructured (P260,000 x 8% x 2) _41,600
__50,600
Future cash flows to liquidate the debt
P310,600
8-11: d
8-12: d
Loss on transfer of land:
Original cost P290,000
Market value _270,000
P 20,000
Gain on restructuring of debt:
Carrying value of debt P300,000
Market value of land _270,000
P 30,000
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137
8-13: a
Transfer gain (loss):
Carrying amount of equipment P80,000
Fair value of equipment 75,000
Transfer loss P(5,000)
Restructuring gain:
Carrying amount of the debt P100,000
Fair value of equipment transferred 75,000
Restructuring gain P 25,000
8-14: d
Carrying amount of real estate transferred P100,000
Fair value of real estate 90, 000
Loss on restructuring of payables P(10,000)
8-15: d
Carrying amount of liability P150,000
Fair value of real estate transferred 90,000
Restructuring gain P 60,000
8-16: c
Gain on revaluation of land (120,000 – 85,000) P 35,000
Gain on the extinguishment of debt (185,000 – 120,000) 65,000
Total gain P100,000
8-17: a
Carrying value of debt (P800,000 + 80,000) P880,000
Total future payments (P700,000 + 80,000) 780,000
Restructuring gain P100,000
8-18: a
First determine the expected future cash flows as follows:
70,000 x .79719 = P55,803
5,600 x 1.69005 = 9,464
Present value of future cash flow P65,267
The interest revenue can be computed using the effective interest method
as follows:
Present value at 12/31/06 P65,267
Interest income at 12/31/07 (65,267 x 12%) 7,832
Interest receivable at 12/31/07 (70,000 x 8%) 5,600 2,232
Present value at 12/31/07 P67,499
Interest income at 12/31/08 (67,499 x 12%) P 8,100
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Chapter 8
SOLUTIONS TO PROBLEMS
Problem 8 – 1
Journal entries for company emerging from bankruptcy using fresh start
accounting:
– Receivables.......................................................................................10,000
Inventory. .........................................................................................10,000
Building............... 100,000
Reorganization value in excess of amount
Allocable to tangible assets.........................................................60,000
Additional paid in capital...................................................... 180,000
To adjust accounts to market value as part of fresh start accounting. Since the company has
a reorganization value of P760,000 but the assets have a market value of only P700,000
(P90,000 + P210,000 + P400,000), and account entitled Reorganization Value in Excess of
Amount Allocable to Tangible Assets must be recorded for P60,000.
Liabilities............. 300,000
Common stock (P330,000 x 80%)............................................... 264,000
Gain on debt discharge................................................................ 36,000
To record settlement of liabilities.
Problem 8 – 2
2008
July 14: Costs of reorganization................................................................50,000
Cash with escrow agent........................................................ 50,000
Common stock 580,000
Common stock (60,000 x P1)............................................... 60,000
Additional paid in capital...................................................... 520,000
Note payable – 10% 120,000
Interest payable (P120,000 x 10% x 3/12)................................... 3,000
Note payable – 12%.............................................................. 123,000
Trade accounts payable 100,000
Cash P100,000 x 0.80).......................................................... 80,000
Gain on debt discharge......................................................... 20,000
Additional paid in capital 290,000
Gain on debt discharge 20,000
Retained earnings.................................................................. 260,000
Costs of reorganization......................................................... 50,000
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Problem 8 – 3
Jade Corporation
Balance Sheet
December 31, 2008
ASSETS
Current assets:
Cash ................................................................................... P 23,000
Inventory............................................................................. __45,000 P 68,000
Property and equipment:
Land ................................................................................... 140,000
Buildings............................................................................. 220,000
Equipment........................................................................... _154,000 _514,000
Total assets. ........................................................................ P582,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities not subject to compromise
Current liabilities:
Accounts payable................................................................. P 60,000
Long-term liabilities:
Note payable (2006)...... P100,000
Note payable (2003)...... _100,000. ._ 200,000 P260,000
Liabilities subject of compromise
Accounts payable................................................................. 123,000
Accrued expenses................................................................ 30,000
Income taxes payable........................................................... 22,000
Note payable (due 2008)....................................................... _170,000 _345,000
Total liabilities. ................................................................... 605,000
Stockholders' Equity
Common stock. ................................................................... 200,000
Retained earnings (deficit).................................................... (223,000) _(23,000)
Total liabilities and stockholders' equity (deficit)................. P582,000
Problem 8 – 4
Preliminary computations:
Book values prior to reorganization:
Total assets (P100,000 + P112,000 + P420,000 + P78,000).............. P710,000
Total liabilities (P80,000 + p35,000 + P100,000 + P200,000 +
P185,000 + P200,000)................................................................. P800,000
Common stock (given)...................................................................... P240,000
Deficit (given) ............................................................................. P330,000
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Chapter 8
Book values after reorganization:
Total assets (reorganization value)............................................ P780,000
Total liabilities (P5,000 + P4,000 + P100,000 + P50,000 +
P71,000 + P110,000)........................................................... P340,000
Common stock (returned shares are reissued)........................... P240,000
Deficit (eliminated).................................................................... –0–
Additional paid in capital (squeeze).......................................... P200,000
Since the company will have 30,000 shares outstanding after the reorganization, the
additional paid in capital equals P6.66 per share.
Because the company has a reorganization value of P780,000 but the assets have a
market value of only P735,000, an account entitled Reorganization Value in Excess of
Amount allocable to Tangible Assets must be recognized for P45,000.
JOURNAL ENTRIES:
1. Land and buildings..................................................................... 80,000
Reorganization Value in excess of amount
allocable to tangible assets...................................................45,000
Accounts receivable.......................................................
20,000
Inventory ........................................................................
22,000
Equipment......................................................................
13,000
Additional paid in capital...............................................
70,000
To adjust accounts to market value as part of fresh start accounting.
2. Common stock........................................................................... 144,000
Additional paid in capital.....................................................
144,000
To record shares turned in to the company by the owners as part of the
reorganization plan. 18,000 shares at P8 par value.
3. Accounts payable....................................................................... 80,000
Note payable ........................................................................ 5,000
Common stock, P8 par value............................................... 8,000
Additional paid in capital (P6.66 per share)........................ 6,666
Gain on debt discharge......................................................... 60,334
To record settlement of accounts payable.
4. Accrued expenses....................................................................... 35,000
Note payable ........................................................................ 4,000
Gain on debt discharge......................................................... 31,000
To record settlement of accrued expenses.
5. Note payable ...... 200,000
Note payable ........................................................................ 50,000
Common stock, P8 par value............................................... 80,000
Additional paid in capital (P6.66 per share)........................ 66,667
Gain on debt discharge......................................................... 3,333
To record settlement of note payable due in 2007
6. Note payable ...... 185,000
Note payable ........................................................................ 71,000
Common stock, P8 par value............................................... 56,000
Additional paid in capital, P6.66 per share.......................... 46,667
Gain on debt discharge......................................................... 11,333
To record settlement of note payable due in 2008
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Problem 8 – 5
7. Note payable. ....................................................................................200,000
Note payable. .............................................................................. 110,000
Gain on debt discharge................................................................ 90,000
To record settlement of note payable due in 2009
8. Additional paid in capital (P334,000 – P200,000).............................134,000
Gain on debt discharge......................................................................196,000
Retained earnings (deficit).......................................................... 330,000
To adjust additional paid in capital to appropriate balance, close out gain, and eliminate
deficit balance as part of fresh start accounting.
Since the Company has a reorganization value of P800,000 but only P653,000 can be assigned to
specific assets based on market value, the remaining P147,000 is reported as a Reorganization
Value in Excess of Amount Allocable to Identifiable Assets.
Sun Corporation
Balance Sheet – Fresh Start Accounting
December 31, 2008
ASSETS
Current assets
Accounts receivable................................................................................... P 18,000
Inventory................................................................................................... _111,000 P129,000
Property and equipment
Land and buildings. ................................................................................... 278,000
Machinery................................................................................................. _121,000 399,000
Intangible assets
Patents ................................................................................................... 125,000
Reorganization value in excess of amount allocable To identifiable assets _147,000 _272,000
Total assets. .............................................................................................. P800,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable....................................................................................... P 97,000
Long-term liabilities
Note payable (due in 2 years)..................................................................... P 35,000
Note payable (due in 5 years)..................................................................... 50,000
Note payable (due in 8 years)..................................................................... _100,000 _185,000
Total liabilities. ......................................................................................... P282,000
Stockholders' Equity:
Common stock. ......................................................................................... P500,000
Additional paid in capital (squeeze)........................................................... __18,000 _518,000
Total liabilities and stockholders' equity........................................... P800,000
