Use the following information to answer Questions
A company emerging from Chapter 11 reorganization has the following balance sheet:
$$\begin{array} { | l | r | l | r | }
\hline \text { Current assets } & \$ 150,000 & \text { Postpetition liabilities } & \$ 100,000 \
\hline \text { Noncurrent assets } & 900,000 & \text { Liabilities subject to compromise } & 1,000,000 \
\hline & & \text { Common tock } & 200,000 \
\hline & & \text { Retained deficit } & \{\$ 250,000 \} \
\hline \text { Total } & \$ 1,050,000 & \text { Total } & \$ 1,050,000 \
\hline
\end{array}$$ The plan of reorganization provides for the following:
• Estimated reorganization value is $750,000.
• Liabilities subject to compromise are replaced with $500,000 in notes payable and 60% of the new common stock issue.
• Existing shareholders receive 40% of the new stock issue.
• Noncurrent assets are written down by $300,000.
-The entry to record restructuring of the interests of prior shareholders results in a credit to additional paid-in capital of:

Question

Use the following information to answer Questions
A company emerging from Chapter 11 reorganization has the following balance sheet:
 $$\begin{array} { | l | r | l | r | } 
\hline \text { Current assets } & \$ 150,000 & \text { Postpetition liabilities } & \$ 100,000 \
\hline \text { Noncurrent assets } & 900,000 & \text { Liabilities subject to compromise } & 1,000,000 \
\hline & & \text { Common tock } & 200,000 \
\hline & & \text { Retained deficit } & \{\$ 250,000 \} \
\hline \text { Total } & \$ 1,050,000 & \text { Total } & \$ 1,050,000 \
\hline
\end{array}$$ The plan of reorganization provides for the following:
• Estimated reorganization value is $750,000.
• Liabilities subject to compromise are replaced with $500,000 in notes payable and 60% of the new common stock issue.
• Existing shareholders receive 40% of the new stock issue.
• Noncurrent assets are written down by $300,000.
-The entry to record restructuring of the interests of prior shareholders results in a credit to additional paid-in capital of:

Quizplus · Accepted Answer

The restructuring of the interests of prior shareholders involves allocating 40% of the new common stock issue to them. Given the estimated reorganization value is $750,000, and liabilities are replaced with $500,000 in notes payable, the equity value is $250,000 ($750,000 - $500,000 in notes payable). 40% of this equity value is $100,000 ($250,000 * 40%). Since the original common stock was $200,000 and the value allocated to prior shareholders is now $100,000, the difference of $100,000 is credited to additional paid-in capital. However, the retained deficit of $250,000 must also be considered. The restructuring would eliminate this deficit against the common stock and additional paid-in capital. Since the common stock is reduced to $100,000 (40% of the new equity), the remaining $150,000 ($250,000 deficit - $100,000 reduction in common stock) would be credited to additional paid-in capital, resulting in a total credit of $250,000 ($100,000 from the reduction in common stock value + $150,000 from eliminating the retained deficit). However, the correct calculation should focus on the restructuring entry itself without directly offsetting the retained deficit in this manner, leading to an error in the explanation. The correct approach involves directly calculating the impact on additional paid-in capital based on the restructuring agreement and the new stock issue, without subtracting the retained deficit in this step.

Use the Following Information to Answer Questions a Company Emerging

Use the Following Information to Answer Questions
a Company Emerging