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Accounting Problems on Corporate Liquidation

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Please refer to the attachment for the questions.
Do the following:
1) Prepare Income statement for company going through a bankruptcy reorganization
2) Adjusting a company coming out of reorganization to fresh start accounting
3) Reporting of debts during liquidation
4) Distribution of assets in a liquidation
5) Payments to be made on unsecured and partially secured liabilities
6) Prepare a balance sheet for a company in bankruptcy reorganization

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Step by step solution to accounting problems on corporate liquidation.

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John Ralph's Corporations: liquidation issues, estate planning

See attached file for full problem description.

John Ralph owns The Ralph Construction Company (RCC), a C corporation with a September 30, year end. For ten years RCC constructed special-purpose buildings and reported revenues on the percentage-of-completion method.

John also owns Construction Equipment, Inc. (CE). CE is a calendar year S corporation that rents and leases construction equipment to contractors. Typically 25% of CE's revenue have been from RCC. CE uses the accrual basis of accounting.

On September 30th of Year 10, RCC's tax-basis balance sheet:


Current Assets
Cash $2,502,826
Certificates of deposit 125,949
Investment Securities 2,197,287
Accounts receivable net 254,250
Prepaid expenses & other current assets 26,100
Total Current Assets 5,106,412

Property & Equipment $1,262,732
Less: Accumulated Deprec. 723,496

Liabilities & Stockholder's Equity

Current Liabilities
Accounts Payable $819,390
Accrued expenses 172,066
Total Current Liabilities $991,456

Stockholder's Equity
Common stock 500
Paid-in capital 77,413
Retained earnings 4,576,279

The fair market value of the investment securities is about $4 million. The value of the equipment is about $2 million. In the past, RCC has maintained, for purposes of the Accumulated Earnings Tax that it needs a reserve of at least $ 4 million dollars to prepare for the purchase of new equipment.

On December 31 of Year 10, Construction Equipment's tax-basis balance sheet showed:


Current Assets
Cash $1,397,848
Accounts receivable net 525,000
Total Current Assets 1,922,848

Property & Equipment $1,385,984
Less: Accumulated Deprec. -423,439

Liabilities & Stockholder's Equity

Current Liabilities
Accounts Payable $86,982
Accrued expenses 2,091
Total Current Liabilities $89,073

Stockholder's Equity
Common stock 500
Paid-in capital 25,893
Retained earnings 2,769,927

The equipment of this company has a FMV of about $800,000.

In February, Mr. Ralph sold all the fixed assets owned by both companies to an unrelated third party for FMV and moved to Alaska. He doesn't know what he should do with either company now.

1. Explain the issues Mr. Ralph and his companies would face if he did nothing and continued to hold the remaining assets where they are.
2. Explain the tax ramifications to both Mr. Ralph and his companies if he were to liquidate both companies immediately.
3. Suggest two alternative courses of action. Explain why these options are better than doing nothing or liquidating immediately. Evaluate the pros and cons of each suggestion.
4. Provide at least one example of an estate planning issue that might make it more beneficial to liquidate the companies at some point.
5. Make a final recommendation.

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