Ristoni Company is in the proc
Ristoni Company is in the process of emerging from a Chapter 11bankruptcy. It will apply fresh start accounting as of December 31,2017. The company currently has 40,000 shares of common stockoutstanding with a $320,000 par value. As part of thereorganization, the owners will contribute 26,000 shares of thisstock back to the company. A retained earnings deficit balance of$471,000 exists at the time of this reorganization.
The company has the following asset accounts:
| Book Value | Fair Value | |||
| Accounts receivable | $ | 100,000 | $ | 55,000 |
| Inventory | 112,000 | 100,000 | ||
| Land and buildings | 601,000 | 650,000 | ||
| Equipment | 57,000 | 42,000 | ||
The company’s liabilities will be settled as follows. Assumethat all notes will be issued at reasonable interest rates.
Accounts payable of $90,000 will be settled with a note for$7,000. These creditors will also get 1,000 shares of the stockcontributed by the owners.
Accrued expenses of $45,000 will be settled with a note for$6,000.
Note payable of $110,000 (due 2021) was fully secured and hasnot been renegotiated.
Note payable of $285,000 (due 2020) will be settled with a notefor $60,000 and 14,000 shares of the stock contributed by theowners.
Note payable of $255,000 (due 2018) will be settled with a notefor $81,000 and 11,000 shares of the stock contributed by theowners.
Note payable of $236,000 (due 2019) will be settled with a notefor $120,000.
The company has a reorganization value of $944,000.
Prepare all journal entries for Ristoni so that the company canemerge from the bankruptcy proceeding. (Do not roundintermediate calculations. Round your final answers to the nearestdollar amount. If no entry is required for a transaction/event,select “No journal entry required” in the first accountfield.)
Answer:
| Account | Explanation | Debit | Credit | |
| 1 | Reorganization Account | 72,000 | ||
| Accounts Receivables | =100,000-55,000 | 45,000 | ||
| Inventory | =112,000-100,000 | 12,000 | ||
| Equipment | =57,000-42,000 | 15,000 | ||
| To record reduction value of assets | ||||
| 2 | Land and building | =650,000-601,000 | 49,000 | |
| Reorganization Account | 49,000 | |||
| To record increased value of asset. | ||||
| 3 | Accounts Payable | 90,000 | ||
| Bank | 7,000 | |||
| Equity Share Capital | =1,000*8=8,000 | 8,000 | ||
| Reorganization Account | 75,000 | |||
| To record settlement of AP by issuing of 1,000 shares and paid$7,000 | ||||
| 4 | Notes Payable(due 2021) | 110,000 | ||
| Notes Payable(due 2020) | 285,000 | |||
| Notes Payable(due 2018) | 255,000 | |||
| Notes Payable(due 2019) | 236,000 | |||
| Bank | =110,000+60,000+81,000+120,000 | 371,000 | ||
| Equity Share Capital | =(14,000+11,000)*8 | 200,000 | ||
| Reroganization Account | 315,000 | |||
| To record settlement of Notes payable | ||||
| 5 | Equity Share Capital | =26,000*8 | 208,000 | |
| Reorganization Account | 208,000 | |||
| To record surrender of 26,000 shares | ||||
| 6 | Reorganization Account | 471,000 | ||
| Profit & Loss A/c | 471,000 | |||
| Reserves | 104,000 | |||
| To record transfer of P & L balance to the ReorganizationAccount and balance in Reorganization account transfer toResrves. |
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