Kentucky Blue, Inc., a lawn care service corporation, is in serious financial difficulty with a deficit of $2,100,000.The company's plant and equipment were designed for highly specialized products and activities.Therefore, they would yield only a small fraction of their book value upon sale.Creditors realize that they will receive little if the corporation is dissolved.In view of the renewed interest in professional lawn care, a plan of reorganization under Chapter 11 was adopted and received the necessary approvals.

Required:

Prepare journal entries to record the following stipulations of the plan:

a.Replace the 14% first mortgage bonds with face value of $300,000, on which there is $13,000 of unamortized premium, with 10% interest bonds, with a face value of $250,000.To cover the accrued interest of $42,000 on the 14% bonds, bondholders will receive 20,000 shares of new $1 par common stock.

b.Unsecured accounts and notes payable total $200,000.Creditors have agreed to accept $0.55 on the dollar.

c.Replace the 10%, $100 par, cumulative participating preferred stock (of which 10,000 shares are outstanding, having a related paid-in capital in excess of par of $170,000) with an equal number of shares of 8%, $40 par, noncumulative nonparticipating preferred stock.The corporation will no longer be liable for the $100,000 of undeclared dividends in arrears on the 10% preferred stock.

d.Replace the 200,000 shares of $10 par common stock, having a discount of $80,000, with an equal number of $1 par common shares.

e.Eliminate the deficit.

Question

Kentucky Blue, Inc., a lawn care service corporation, is in serious financial difficulty with a deficit of $2,100,000.The company's plant and equipment were designed for highly specialized products and activities.Therefore, they would yield only a small fraction of their book value upon sale.Creditors realize that they will receive little if the corporation is dissolved.In view of the renewed interest in professional lawn care, a plan of reorganization under Chapter 11 was adopted and received the necessary approvals.
​
Required:
​
Prepare journal entries to record the following stipulations of the plan:
​
a.Replace the 14% first mortgage bonds with face value of $300,000, on which there is $13,000 of unamortized premium, with 10% interest bonds, with a face value of $250,000.To cover the accrued interest of $42,000 on the 14% bonds, bondholders will receive 20,000 shares of new $1 par common stock.​
​
b.Unsecured accounts and notes payable total $200,000.Creditors have agreed to accept $0.55 on the dollar.​
​
c.Replace the 10%, $100 par, cumulative participating preferred stock (of which 10,000 shares are outstanding, having a related paid-in capital in excess of par of $170,000) with an equal number of shares of 8%, $40 par, noncumulative nonparticipating preferred stock.The corporation will no longer be liable for the $100,000 of undeclared dividends in arrears on the 10% preferred stock.​
​
d.Replace the 200,000 shares of $10 par common stock, having a discount of $80,000, with an equal number of $1 par common shares.​
​
e.Eliminate the deficit.​
​

Quizplus · Accepted Answer

The Answer of Kentucky Blue, Inc., a lawn care service corporation, is in serious financial difficulty with a deficit of $2,100,000.The company's plant and equipment were designed for highly specialized products and activities.Therefore, they would yield only a small fraction of their book value upon sale.Creditors realize that they will receive little if the corporation is dissolved.In view of the renewed interest in professional lawn care, a plan of reorganization under Chapter 11 was adopted and received the necessary approvals.
​
Required:
​
Prepare journal entries to record the following stipulations of the plan:
​
a.Replace the 14% first mortgage bonds with face value of $300,000, on which there is $13,000 of unamortized premium, with 10% interest bonds, with a face value of $250,000.To cover the accrued interest of $42,000 on the 14% bonds, bondholders will receive 20,000 shares of new $1 par common stock.​
​
b.Unsecured accounts and notes payable total $200,000.Creditors have agreed to accept $0.55 on the dollar.​
​
c.Replace the 10%, $100 par, cumulative participating preferred stock (of which 10,000 shares are outstanding, having a related paid-in capital in excess of par of $170,000) with an equal number of shares of 8%, $40 par, noncumulative nonparticipating preferred stock.The corporation will no longer be liable for the $100,000 of undeclared dividends in arrears on the 10% preferred stock.​
​
d.Replace the 200,000 shares of $10 par common stock, having a discount of $80,000, with an equal number of $1 par common shares.​
​
e.Eliminate the deficit.​
​