18-16

Corporate Liquidations and

Reorganizations
Pearson Education, Inc. publishing as
Prentice Hall
Solution P18-7
1 The reorganization is eligible for
fresh start accounting because the
liabilities on June 30, 2011 of $16,500
exceed the reorganization value
of $16,000 by $500. Also, the
common stock of the new entity is
allocated $5,000 to prepetition
creditors and $2,000 to Lowstep’s old
stockholders, so that the old
stockholders have less than a 50
percent
interest in the new entity.
2 Entries to adjust Lowstep’s
accounts for the reorganization plan:
Prepetition liabilities $12,500
Accounts payable (old) $ 800
Wages payable (old) 400
Note payable (new) 3,800
Common stock (new) 5,000
Gain on debt restructuring 2,500
To adjust prepetition liabilities to
conform with the plan.
Loss on asset adjustments to fair
values $ 4,000
Inventories 400
Land 1,000
Buildings — net
$1,400
Patent 4,000
To adjust assets to their fair values.
Common stock (old) $ 7,000
Common stock (new) $2,000
Additional paid-in capital 5,000
To record exchange of common stock.
Gain on debt discharge $ 2,500
Additional paid-in capital 5,000
Reorganization value in excess of fair
value 1,000
Loss on asset adjustments to fair
values $4,000
Deficit 4,500
To eliminate deficit and record
adoption of fresh start reporting.
18-16 Corporate Liquidations and Reorganizations Pearson Education, Inc. publishing as Prentice Hall
Solution P18-7 1 The reorganization is eligible for fresh start accounting because the liabilities on June
30, 2011 of $16,500 exceed the reorganization value of $16,000 by $500. Also, the common stock of the
new entity is allocated $5,000 to prepetition creditors and $2,000 to Lowstep’s old stockholders, so that
the old stockholders have less than a 50 percent interest in the new entity.

2 Entries to adjust Lowstep’s accounts for the reorganization plan:

Prepetition liabilities $12,500

Accounts payable (old) $ 800

Wages payable (old) 400

Note payable (new) 3,800

Common stock (new) 5,000

Gain on debt restructuring 2,500

To adjust prepetition liabilities to conform with the plan.

Loss on asset adjustments to fair values $ 4,000

Inventories 400

Land 1,000

Buildings — net $1,400

Patent 4,000

To adjust assets to their fair values.

Common stock (old) $ 7,000

Common stock (new) $2,000

Additional paid-in capital 5,000

To record exchange of common stock.

Gain on debt discharge $ 2,500

Additional paid-in capital 5,000

Reorganization value in excess of fair value 1,000

Loss on asset adjustments to fair values $4,000

Deficit 4,500

To eliminate deficit and record adoption of fresh start reporting.

3.

Lowstep Corporation
 Final Balance Sheet

as of July 8, 2011

Assets

Cash $ 6,700

Trade receivables — net 1,000

Inventories 2,000

Land 2,000

Buildings — net 1,500

Equipment — net 1,800

Reorganization value in excess of fair values 1,000

Total assets $16,000

Liabilities and Stockholders’ Equity

Accounts payable $ 3,000

Accounts payable (old) 800

Wages payable 1,000

Wages payable (old) 400

Notes payable (new) 3,800

Total liabilities 9,000

Common stock (new) 7,000

Total liabilities and stockholders’ equity $16,000

Note: The final balance sheet of Lowstep Corporation will be the same as

the beginning balance sheet of Highstep Corporation.