CORPORATE REORGANIZATION

Aristotle Inc has petitioned the court for relief and this was granted on Jan 1, 2012 when the stockholders pledged to
infuse additional capital if the business is found unable to service its debts after one year. It has currently 30,000
common shares with a par value of P100 or a total of P3,000,000. Retained earnings is a deficit of P3,100,000.
The petition includes a deferment of liabilities for a period of one year and condonation of interest expense during
receivership. The company has the following assets and liabilities as at Jan 1, 2012:
Assets
Cash
Accounts receivables
Inventories
Land
Buildings (net of 20% depn)
Equipment (net of 20%depn))

Liabilities
P

96,000
800,000
1,000,000
1,000,000
1,200,000
580,000

Accounts Payable
7% Notes dated Jan 1, 2011
Accrued Interest
7.5% Bonds issued Jan 1, 2011
Salaries Payable

P 200,000
1,800,000
276,000
2,000,000
500,000

The following are the transactions related to asset realization and liquidation of liabilities which took place
in 2012. In an attempt by the company to rehabilitate, the court placed it under receivership with Atty. John
Magno. The aforementioned assets and liabilities were entrusted to him.
1. A purchase order for P100,000 was honored by Atty Magno.
2. Credit Sales amounted to P950,000.
3. Collections were 80% of the old accounts and 75% of the new accounts.
4. Old accounts were paid in the amount of P80,000 and 50% of the new accounts.
5. The land was sold at a gain of P300,000
6. Two of the three buildings were sold at a loss of P200,000.
7. Half of the equipments which were idle were sold at 80% of its book value.
8. Operating expenses of P130,000 were paid including reorganization cost of P30,000.
9. Inventories on hand at this point amounted to P550,000
10. Provision for depreciation: 5% on the remaining building, and 8% on the remaining equipment.
11.Doubtful accounts were estimated at 3% of the outstanding balances.
12. On Dec 31, 2012 the company was ready to pay for the liabilities:
a) The old notes were paid including accrued interest from issue date to Dec 2011 at the negotiated rate
of 5%.
b) 50% of the bonds were paid and the bondholders agreed to receive this at the book value including
accrued interest for 2011 at a negotiated rate of 5%.
c) Half of the salaries payable were also paid.
Required:

a) Entries in 2012 for both books including the transfer to receiver on Jan 1, 2012 and back to the company on Jan 3, 2013.
b) After the transfer back to the company was made, in an attempt to further improve financial standing of the business
the bondholders agreed to receive unissued shares of stock for the remaining balance including accrued interest.
Additional entry in the books of the corporation.
c) Determine the Cash Balance, Share Capital and Retained Earnings as at January 3, 2013.
d) Realization and Liquidation Account as at Jan 1, 2013. Prove the balance of the assets and liabilities
for hidden charges and credits.

3AAC and 3EAC

Solution to Aristotle Problem:
Book of Magno, Receiver
Aristotle in Receivership
100,000
Cash
96,000
Accounts Receivable-old
800,000
Inventory
1000,000
Land
1,000,000
Building
1,200,000
Equipment
580,000
Accounts Payable-old
Salaries Payable-old
Notes Payable-old
Bonds Payable-old
Accrued Interest-old
Merchandise Inventory
Accounts Payable-new

100,000

Accounts Receivable (new)

Sales

950,000

Cash
Accts Receivable new
Accounts Receivable- old
Accounts Payable-Old
Accounts Payable New
Cash
Cash
Land
Gain on Sale of Land

Books of Aristotle Co

200,000
500,000
1,800,000
2,000,000
276,000
100,000
950,000

1,352,500
712,500
640,000
80,000
50,000
130,000
1,300,000
1,000,000
300,000

Cash
Loss on sale of Bldg
Building, net

600,000
200,000

Cash

232,000

800,000

Accounts Payable
Salaries Payable
Notes Payable
Bonds Payable
Accrued Interest
Magno, Receiver
Cash
Accts Receivable-old
Inventory
Land
Building
Equipment

200,000
500,000
1,800,000
2,000,000
276,000
100,000
96,000
800,000
1.000,000
1,000,000
1,200,000
580,000

Loss on sale of Equipt

Equipment, net

58,000
290,000

Operation Expense
Receiver Expenses
Cash

100,000
30,000

Cost of Goods Sold

Mdse Inventory

500,000

Depreciation, Building
Depreciation, Equipment
Accum Depn, Building
Accum Depn, Equipment
Bad Debts
Allow for Bad Debts-old
Allow for Bad Debts-new

130,000
500,000
25,000
29,000
25,000
29,000
11,925
4,800
7,125

Notes Payable
Accrued Interest
Cash
Gain on Debt Settlement

1,800,000
126,000

Bonds Payable-old
Accrued Interest
Cash
Gain on Debt Settlement

1,000,000
75,000

1,890 ,000
36,000

1,050,000
25,000

Salaries Payable-old
Cash

250,000

Sales
Gain Sale of Land
Gain on Debt Settlement
Loss on Sale of Bldg
Loss on Sale of Equipt
Operating Expenses
Receiver Expenses
Depreciation
Bad Debts

950,000
300,000
61,000

250,000

200,000
58,000
100,000
30,000
54,000
11,925

Cost of Goods Sold

Income Summary
Income Summary
Aristotle in Receivrship
Aristotle in Receivership
Allow for Bad Debts-New
Allow for Bad Debts-Old
Accts Payable-New
Accts Payable-old
Bonds Payable-old
Accrued Interest-old
Salaries Payable-old
Cash
Accts Recble- new
Accts Recble-old
InventoriesBldg, net
Equipt, net

500,000
357,075
357,075

Magno, Receiver
Retained Earnings

357,075

357,075

130,500
237,500
160,000
600,000
375,000
261,000

130,500
237,500
160,000
600,000
375,000
261,000

Cash
Accts Recble- new
Accts Recble-old
InventoriesBldg, net
Equipt, net
Aristotle in Receivership
All for Bad Debts-New
Allow for Bad Debts-Old
Accts Payable-New
Accts Payable-old
Bonds Payable-old
Accrued Interest-old
Salaries Payable-old

257,075
7,125
4,800
50,000
120,000
1,000,000
75,000
250,000

b)

Bonds Payable
Accrued Interest
Share Capital
a) Share Capital P3,000,000 + P1,075,000=
Retained Earnings P3,100,000 P357,075
Net Assets

P4,075,000
(2,742,925)
P1,332,075

357,075

257,075
7,125
4,800
50,000
120,000
1,000,000
75,000
250,000
1,000,000
75,000
1,075,000

AS S E T S
To be realized: Accounts Receivable-.old
800,000 Realized: Accts Receivable new 712,500
Inventory
1,000,000
Accts Receivable old 640,000
Land
1,000,000
Land
1,300,000
Building
1,200,000
Building
600,000
Equipment
580,000
Equipment
232,000
Acquired:
Accounts Receivable-new
950,000 Not Realized:
Inventory
100,000
Accounts Receivable new 230,375
Accounts Receivable old 155,200
Inventory-new
100,000
Inventory-old
500,000
Building
375,000
Equipment
261,000
Liquidated: Accts Payable old
Accounts Payable new
Notes Payable and
Accrued Interest
Bonds Payable and
Accrued Interest
Salaries Payable
Not Liquidated:
Accounts Payable old
Accounts Payable new
Salaries Payable
Bonds Payable
Accrued Interest

Operating Expenses
Receiver Expenses
Net Income

LIABILITIES
80,000
To be liquidated: Accts Payable-old 200,000
50,000
Bonds Payable-old 2,000,000
1,800,000
Notes Payable-old 1,800,000
90,000
Accrued Interest-old 276,000
1,000,000
Salaries Payable-old 500,000
50,000
250,000
Incurred:
Accts Payable-new 100,000
120,000
50,000
250,000
1,000,000
75,000

SUPPLEMENTARY
100,000
Sales
30,000
257,075

950,000

To prove: Debit Balance of Assets will be P523,925, made up of : Cost of Sales

P 500,000
Loss on Sale of Building 200,000

TOTALS
10,832,075

10,832,075

Loss on Sale of Equipt

58,000
Gain on Sale of Land
(300,000)
Depreciation
54,000
Bad Debts
11,925
Debit Balance
P 523,925
To prove: Credit Balance of Liabilities will be P61,000, made up of: Gain on Debt Settlement P 61,000
To prove the cash balance: Equity
1,332,075
Liabilities not liquidated
420,000
Assets not realized
(1,621,575)
Cash balance
130,500
To determine net income the short cut way:
Assets to be realized
4,580,000 Assets realized
3,484,500
Assets Acquired
1,050,000 Assets not realized
1,621,575
Liabilities liquidated
3,320,000 Liabilities to be liquidated
4,776,000
Liabilities not liquidated
1,495,000 Liabilities assumed
100,000
Supplementary charges
130,000 Supplementary credits
950,000
Totals
10,585,000 Totals
10,932,075
Net Income
357,075
10,932,075
10,932,075
Or get the Debit balance of Assets
Add Supplementary charges
Debit total

523,925
130,000

Get the balance of

Add Supplementary credits
Credit total

61,000
950,000

Net Income

3FAC and 3BAC

Solution to Aristotle Problem:

653,925

1,011,000
357,075

Book of Magno, Receiver

Aristotle in Receivership
100,000
Cash
96,000
Accounts Receivable-old
800,000
Inventory
1000,000
Land
1,000,000
Building
1,200,000
Equipment
580,000
Accounts Payable-old
Salaries Payable-old
Notes Payable-old
Bonds Payable-old
Accrued Interest-old
Merchandise Inventory
Accounts Payable-new

100,000

Accounts Receivable (new)

Sales

950,000

Cash
Accts Receivable new
Accounts Receivable- old
Accounts Payable-Old
Accounts Payable New
Cash
Cash
Land
Gain on Sale of Land

Books of Aristotle Co

200,000
500,000
1,800,000
2,000,000
276,000
100,000
950,000

1,352,500
712,500
640,000
80,000
50,000
130,000
1,300,000
1,000,000
300,000

Cash
Loss on sale of Bldg
Building, net

600,000
200,000

Cash
Loss on sale of Equipt
Equipment, net

232,000
58,000

800,000

290,000

Accounts Payable
Salaries Payable
Notes Payable
Bonds Payable
Accrued Interest
Magno, Receiver
Cash
Accts Receivable-old
Inventory
Land
Building
Equipment

200,000
500,000
1,800,000
2,000,000
276,000
100,000
96,000
800,000
1.000,000
1,000,000
1,200,000
580,000

Operation Expense
Receiver Expenses
Cash

100,000
30,000

Cost of Goods Sold

Mdse Inventory

550,000

Depreciation, Building
Depreciation, Equipment
Accum Depn, Building
Accum Depn, Equipment
Bad Debts
Allow for Bad Debts-old
Allow for Bad Debts-new

130,000
550,000
25,000
29,000
25,000
29,000
11,925
4,800
7,125

Notes Payable
Accrued Interest
Cash
Gain on Debt Settlement

1,800,000
126,000

Bonds Payable-old
Accrued Interest
Cash
Gain on Debt Settlement

1,000,000
75,000

1,890 ,000
36,000

1,050,000
25,000

Salaries Payable-old
Cash

250,000

Sales
Gain Sale of Land
Gain on Debt Settlement
Loss on Sale of Bldg
Loss on Sale of Equipt
Operating Expenses
Receiver Expenses
Depreciation
Bad Debts
Cost of Goods Sold
Income Summary

950,000
300,000
61,000

250,000

200,000
58,000
100,000
30,000
54,000
11,925
550,000
307,075

Income Summary
Aristotle in Receivrship
Aristotle in Receivership
Allow for Bad Debts-New
Allow for Bad Debts-Old
Accts Payable-New
Accts Payable-old
Bonds Payable-old
Accrued Interest-old
Salaries Payable-old
Cash
Accts Recble- new
Accts Recble-old
InventoriesBldg, net
Equipt, net

307,075

Magno, Receiver
Retained Earnings

307,075

307,075

130,500
237,500
160,000
550,000
375,000
261,000

130,500
237,500
160,000
550,000
375,000
261,000

Cash
Accts Recble- new
Accts Recble-old
InventoriesBldg, net
Equipt, net
Aristotle in Receivership
All for Bad Debts-New
Allow for Bad Debts-Old
Accts Payable-New
Accts Payable-old
Bonds Payable-old
Accrued Interest-old
Salaries Payable-old

207,075
7,125
4,800
50,000
120,000
1,000,000
75,000
250,000

b)

Bonds Payable
Accrued Interest
Share Capital
a) Share Capital P3,000,000 + P1,075,000=
Retained Earnings P3,100,000 - P307,075
Net Assets

To be realized: Accounts Receivable-.old

307,075

207,075
7,125
4,800
50,000
120,000
1,000,000
75,000
250,000
1,000,000
75,000

P4,075,000
(2,792,925)
P1,282,075

AS S E T S
800,000 Realized: Accts Receivable new 712,500

1,075,000

Acquired:

Inventory
1,000,000
Land
1,000,000
Building
1,200,000
Equipment
580,000
Accounts Receivable-new
950,000
Inventory
100,000

Liquidated: Accts Payable old

Accounts Payable new
Notes Payable and
Accrued Interest
Bonds Payable and
Accrued Interest
Salaries Payable
Not Liquidated:
Accounts Payable old
Accounts Payable new
Salaries Payable
Bonds Payable
Accrued Interest

Operating Expenses
Receiver Expenses
Net Income

Accts Receivable old 640,000

Land
1,300,000
Building
600,000
Equipment
232,000
Not Realized:
Accounts Receivable new 230,375
Accounts Receivable old 155,200
Inventory-new
100,000
Inventory-old
450,000
Building
375,000
Equipment
261,000

LIABILITIES
80,000
To be liquidated: Accts Payable-old 200,000
50,000
Bonds Payable-old 2,000,000
1,800,000
Notes Payable-old 1,800,000
90,000
Accrued Interest-old 276,000
1,000,000
Salaries Payable-old 500,000
50,000
250,000
Incurred:
Accts Payable-new 100,000
120,000
50,000
250,000
1,000,000
75,000

SUPPLEMENTARY
100,000
Sales
30,000
307,075

950,000

To prove: Debit Balance of Assets will be P573,925, made up of : Cost of Sales

P 550,000
Loss on Sale of Building 200,000
Loss on Sale of Equipt
58,000
Gain on Sale of Land
(300,000)

TOTALS
10,882,075

10,882,075

Depreciation
Bad Debts
Debit Balance

54,000
11,925
P 573,925

To prove: Credit Balance of Liabilities will be P61,000, made up of: Gain on Debt Settlement P 61,000
To prove the cash balance: Equity
Liabilities not liquidated
Assets not realized
Cash balance
To determine net income the short cut way:
Assets to be realized
4,580,000
Assets Acquired
1,050,000
Liabilities liquidated
3,320,000
Liabilities not liquidated
1,495,000
Supplementary charges
130,000
Totals
10,585,000
Net Income
307,075
10,882,075

Assets realized
Assets not realized
Liabilities to be liquidated
Liabilities assumed
Supplementary credits
Totals

Or get the Debit balance of Assets

Add Supplementary charges
Debit total

573,925
130,000

Get the balance of Liabilities

Add Supplementary credits
Credit total

61,000
950,000

Net Income

1,282,075
420,000
(1,571,575)
130,500
3,484,500
1,671,575
4,776,000
100,000
950,000
10,882,075
10,882,075

703,925

1,011,000
307,075

Delete this page

AR
Invty
Land
Bldg
Equip
Jan 1, 2012

96,000

800,000
1,000,000
1,000,000
1,200,000
580,000
4,676,000

A - 800,000
B1,000,000

200,000

500,000

1,800,000

276,000

2,000,000

(3,100,000)
3,000,000

Donated shares
Acct purchases
AP old paid
Acct sales
Collected AR
Land sold
Bldgs sold
Equipt sold
Expenses

540,000
(50,000) Invty(n)
100,000
(80,000)
AR (new)
950,000
1,112,500 AR(old)
(400,000)
712,500 AR(new)
(712,500)
1,300,000 Land
(1,000,000)
600,000 Bldgs
(800,000)
232,000 Equipt
(290,000)
(130,000)
Invtory
(550,000)

(new) 50,000
(old) (80,000)
Sales
Gain
Loss
Loss
Expenses
Cost of S

950,000
300,000
(200,000)
( 58,000)
(130,000)
(550,000)

(540,000)

Invtory
NP paid
Bonds Paid
Bonds Exchangd
Depreciation
Bad Debts
Jan 1, 2012

(275,000)

(300,000)

(1,936,000)
(1,070,000)

P 74,500

Gain
(1,800,000)

Acc DepnBldg(44,444)
AccDepnEquip(29,000)
Allow for Bad (19,125)
P1,509,931

170,000

200,000

(136,000)
(70,000) (1,000,000)
(70,000) (1,000,000)

25,000

APIC
530,000
Depn
(73,444)
Bad Debts (19,125)
3,000,000

1,785,569

540,000