On December 30, year 1, Hale Corp. paid $400,000 cash
and issued 80,000 shares of its $1 par value common stock to its
unsecured creditors on a pro rata basis pursuant to a reorganization
plan under Chapter 11 of the bankruptcy statutes. Hale
owed these unsecured creditors a total of $1,200,000. Hale’s
common stock was trading at $1.25 per share on December 30,
year 1. As a result of this transaction, Hale’s total stockholders’
equity had a net increase of

(b) The requirement is to determine the net increase in
total stockholders’ equity as a result of the payments to unsecured
creditors pursuant to a reorganization plan under Chapter
11. The net increase in stockholders’ equity can be determined
as follows:
Fair value of liabilities owed to unsecured
creditors $1,200,000
Cash paid (400,000)
Common stock issued (80,000 × $1.25) (100,000)
Gain on settlement of debt $ 700,000
The gain on the settlement of debt would be included in the income
statement and closed to retained earnings. The net in584
crease in stockholders’ equity would equal $800,000 ($700,000
gain + $100,000 FV of stock issued).