SOAL 40

A. FASB ASC Topic 852 (Reorganizations) states that a company that is exiting bankruptcy is
considered a new entity (so that fair values would be applicable for reporting purposes) if two
criteria are met. Otherwise, the company is simply considered to be a continuation of the old
concern, a company that should keep reporting its historical cost figures. The first criterion is that
the fair value of the assets of the emerging company must be less than the allowed claims as of the
date of the order for relief (plus liabilities incurred during reorganization). The second criterion is
that the original owners must be left with less than 50 percent of the voting stock of the emerging
company. Whenever both of these criteria are met, the company’s assets should be reported at
their current fair values.

B. Under fresh start accounting, the assets are adjusted to current value on the date that the company
successfully emerges from bankruptcy reorganization. A reorganization value for the entity’s assets
as a whole is first determined by discounting the cash flows that are anticipated. This balance is
assigned to identifiable assets (both tangible and intangible) in the same manner as in a purchase
combination. Any amount of the reorganization value that exceeds the assigned total is recorded as
goodwill.

C. The reorganization value in excess of the value of the identified assets and liabilities is reported as
the intangible asset goodwill. Goodwill is reviewed each year for impairment.
 SOAL 49

BOOK VALUES AFTER EMERGING FROM REORGANIZATION

Total assets = $637,000 (reorganization value of $650,000 plus proceeds from sale of stock of
-
$77,000 less $90,000 value of land and investments used to settle two debts)
- Total liabilities = $350,000 ($130,000 + $40,000 + $180,000)
Total common stock = $160,000 (10,000 additional shares are issued with a $10 per share par value
-
so that total outstanding shares = 16,000)
- Deficit = -0- (eliminated by the reorganization)
- Additional paid-in capital = $127,000 (figure needed to balance above accounts after reorganization)
Because the company has a reorganization value of $650,000 but the assets have a fair value of only
-
$623,000, Goodwill must be established for $27,000.

Journal
Investment 12,000
Land 23,000
Buildings 52,000
Goodwill 27,000
Account Receivable 20,000
Inventory 16,000
Equipment 31,000
Additional Paid-In Capital (to balance) 49,000
(To adjust accounts to fair value as part of fresh start accounting.)
Cash 77,000
Common Stock ($10 par value) 70,000
Additional Paid-In Capital 7,000
(To record shares sold to new investor.)

Cahs 40,000
Investment 40,000
(Investment Sold)

Notes Payable (Current) 220,000

Cash 40,000
Notes Payable (due in 2024) 130,000
Gain on Discharge of Debt 50,000
(To record settlement of current notes.)

Accounts Payable 129,000

Notes Payable (due in 2021) 40,000
Gain on Discharge of Debt 89,000
(To record settlement of accounts payable.)

Notes Payable (due in 2023) 325,000

 Land 50,000
Notes Payable 180,000
Common Stock ($10 par value) 30,000
Additional Paid-In Capital 23,813
(3/16 of total APIC requirement computed
above)
Gain on Discharge of Debt 41,187
(To record settlement of long-term debt)

Gain on Debt Discharge 180,187

Additional Paid-In Capital ($127,000 – $79,813) 47,187
Retained Earnings (deficit) 133,000
(To adjust additional paid-in capital to appropriate balance, close out gain, and
eliminate deficit balance as part of fresh start accounting.)