Chapter 20 - Corporations in Financial Difficulty Difficulty
Chapter 20 Corporations in Financial Difficulty Multiple Choice Questions
1. What is defined as a condition in which a company is unable to meet debts as the debts mature? A. Deficit B. Liability C. Insolvency D. Credit squeeze
2. Under a composition agreement, A. creditors agree to accept less than the face amount of their claims. B. debtors in financial difficulty transfer assets "without recourse." C. a creditors' committee is initiated with a plan of settlement proposed by the debtor. D. the debtor petitions for relief in a bankruptcy court.
3. In which of the following ways can debt be restructured? I. Assets can be transferred to the creditor. II. An equity interest can be granted to the creditor. III. The terms of the debt can be modified. A. I and II only B. I and III only C. II and III only D. I, II, and III
4. Under which nonjudicial action do creditors agree to assist the debtor in managing the most efficient payment of creditors' claims? A. Debt restructuring arrangement B. Creditors' committee management C. Transfer of assets D. Composition agreement
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Chapter 20 - Corporations in Financial Difficulty Difficulty
5. A transfer of assets by a company in financial difficulty is considered a sale if: I. the transfer includes a recourse provision allowing the buyer to return the asset. II. the transferee obtains the right to pledge or exchange the transferred assets. III. the transferred assets have been isolated from the transferor. IV. the transferor does not maintain effective control over the transferred assets. A. I, II, and IV B. Both I and III C. Both I and II D. II, III, and IV
6. Chapter 11 of the Bankruptcy Code provides for: I. Reorganization. II. Liquidation. A. I only B. II only C. Both I and II D. Neither I nor II
7. Chapter 7 of the Bankruptcy Code provides for: I. Reorganization. II. Liquidation. A. I only B. II only C. Both I and II D. Neither I nor II
8. The Bankruptcy Reform Act contains chapters which deal with: I. Individuals. II. Corporations. III. Municipal governments. A. Only I and II B. Only II and III C. Only I and III D. I, II, and III
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Chapter 20 - Corporations in Financial Difficulty Difficulty
9. A debtor may file which type of petition when seeking judicial protection under the Bankruptcy Reform Act? I. Voluntary II. Involuntary A. I only B. II only C. Either I or II. D. Neither I nor II
10. Creditors may file which type of petition when seeking remedy under the Bankruptcy Code? I. Voluntary II. Involuntary A. I only B. II only C. Either I or II D. Neither I nor II
11. Under the Bankruptcy Code, an insolvent corporation may be: I. Reorganized. II. Liquidated. A. I B. II C. Either I or II D. Neither I nor II
12. Which chapters of the Bankruptcy Code deal with corporations? A. Chapters 1, 3, and 5 B. Chapter 9 C. Chapters 7 and 11 D. Chapters 12 and 13
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Chapter 20 - Corporations in Financial Difficulty Difficulty
13. Which of the following could be true of the proceedings under Chapter 11 of the Bankruptcy Code? A. Always administered by the bankruptcy courts. B. The debtor's assets are sold and its liabilities extinguished. C. The company does not operate during this period. D. The debtor continues as a business after the reorganization.
14. Under Chapter 11 proceedings, what represents the fair value of the entity before considering liabilities and approximates the amount a willing buyer would pay for the entity's assets? A. Reorganization value B. Fire sale value C. Fresh start value D. Excess value
15. A reorganization value in excess of amounts assignable to identifiable assets is: A. not reported. B. reported as an intangible asset called Reorganization Value in Excess of Amounts Allocable to Identifiable Assets. C. reported as Goodwill Associated with Exit or Disposal Activities. D. passed on to prior shareholders of the company.
16. Which of the following observations regarding the use of fresh start accounting is true? A. It is always required under Chapter 11 bankruptcy proceedings. B. Prior shareholders will have control of the emerging company. C. It results in a new reporting entity. D. It is used under Chapter 7 bankruptcy proceedings.
17. _____ have liens, or security interests, on specific assets. A. Secured creditors B. Creditors with priority C. Unsecured creditors D. Assured creditors
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Chapter 20 - Corporations in Financial Difficulty Difficulty
18. As defined by the Bankruptcy Code, creditors with priority: I. have collateral claim against specific assets. II. are unsecured creditors who have priority over other unsecured creditors. III. are the first to be paid from any proceeds available to unsecured creditors. A. I only B. II only C. I, II and II D. Both II and III
19. Which of the following observations concerning claims by general unsecured creditors is NOT true? true? A. They are paid only after secured creditors and unsecured creditors with priority are satisfied to the extent of any legal limits. B. They often receive less than the full amount of their claim. C. They are entitled to "preference payments" at the discretion of the debtor's management. D. The amounts to be paid to them are usually stated as a percentage of the total claim.
20. The payment to general unsecured creditors is often termed: A. a "preference payment." B. a "dividend." C. a "write-off." D. a "bonus."
21. "Preference payments" made by the debtor to one creditor to the detriment of all other creditors within 90 days before the bankruptcy petition was filed: A. is reduced from the monies available to the general unsecured creditors. B. is usually written off. C. may be recovered and returned to the cash available for all creditors. D. are not recovered, as management assurances are binding.
22. The accounting statement of affairs is prepared: A. at the end of the reorganization process. B. at the end of the liquidation process. C. at the beginning of the reorganization process. D. at the beginning of the liquidation process.
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Chapter 20 - Corporations in Financial Difficulty Difficulty
23. What is the general form of the trustee's opening entry, accepting the assets of the debtor company?
A. Option A B. Option B C. Option C D. Option D
24. Which monthly report shows the results of the trustee's fiduciary actions beginning at the point the the trustee trustee accepts the debtor's debtor's assets? assets? A. Statement of affairs B. Statement of realization and liquidation C. Statement of financial position D. Statement of activities
25. The Statement of Realization and Liquidation contains sections for all the following items except: A. assets. B. supplementary items. C. liabilities. D. stockholders equity.
26. In a statement of realization and liquidation, unusual revenue items are reported under: A. assets. B. extraordinary items. C. supplementary items. D. These are never reported.
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Chapter 20 - Corporations in Financial Difficulty Difficulty
27. All of the following items are reported in a statement of realization and liquidation except: A. Cash B. Prepaid assets C. Depreciable assets (net) D. Receiver's expenses
28. Which of the following items are likely to be reported in the supplementary items section of a statement of realization and liquidation? A. Creditors' claims settled during the period. B. Trustee's administration fees. C. New obligations incurred by the trustee. D. Assets subsequently acquired by the trustee.
Orville Company recently petitioned for bankruptcy and is now in the process of preparing a statement of affairs. The carrying values and estimated fair values of the assets of Orville Company are as follows:
Debts of Orville are as follows:
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Chapter 20 - Corporations in Financial Difficulty Difficulty
29. Based on the preceding information, what is the total amount of unsecured claims? A. $113,000 B. $126,000 C. $93,000 D. $121,000
30. Based on the preceding information, what estimated amount will be available for general unsecured creditors upon liquidation? A. $28,000 B. $93,000 C. $113,000 D. $121,000
31. Based on the preceding information, what is the estimated dividend percentage? A. 23 percent B. 93 percent C. 77 percent D. 68 percent
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Chapter 20 - Corporations in Financial Difficulty Difficulty
32. Eagle Company recently petitioned for bankruptcy and is now in the process of preparing a statement of affairs. The following information has been assembled for this statement:
What amount will be paid to the fully secured creditors and the creditors with priority?
A. Option A B. Option B C. Option C D. Option D
33. A "debtor-in-possession" balance sheet is prepared for a company which: A. is having its debts restructured. B. is undergoing a liquidation under Chapter 7. C. is undergoing a reorganization under Chapter 11. D. is in bankruptcy reorganization but management still controls the company.
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Chapter 20 - Corporations in Financial Difficulty Difficulty
34. A debtor-in-possession balance sheet should report: I. Liabilities not subject to compromise. II. Liabilities subject to compromise. A. I only B. II only C. Both I and II D. Neither I nor II
35. On a debtor-in-possession income statement, which of the following items should be reported under the heading "Reorganization Items"? A. Sales B. Selling expenses C. Income tax benefit D. Loss on disposal of assets
Essay Questions
36. What are the conditions necessary for using fresh start reporting in reorganization?
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Chapter 20 - Corporations in Financial Difficulty Difficulty
37. Wilbur Corporation is to be liquidated under Chapter 7 of the Bankruptcy Code. The balance sheet sheet on December December 31, 31, 2008, is as follows: follows:
The following additional information is available: 1. Marketable securities consist of 2,000 shares of Bristol Inc. common stock. The market value per share share of the stock is $8. The stock stock was pledged against against a $20,000, $20,000, 8 percent percent note note payable payable that has accrued interest of $800. 2. Accounts receivable of $40,000 are collateral for a $35,000, 10 percent note payable that has accrued interest of $3,500. 3. Inventory with a book value of $35,000 and a current value of $32,000 is pledged against accounts payable of $60,000. The appraised value of the remainder of the inventory is $50,000. 4. Only $1,000 will be recovered from prepaid insurance. 5. Land is appraised at $65,000 and plant and equipment at $160,000. 6. It is estimated that the franchises can be sold for $15,000. 7. All the wages payable qualify for priority. 8. The mortgages are on the land and on a building with a book value of $110,000 and an appraised value of $100,000. The accrued interest on the mortgages is $7,500. 9. Estimated legal and accounting fees for the liquidation are $10,000. Required a. Prepare a statement of affairs as of December 31, 2008. b. Compute Compute the estimated estimated percentag percentagee settlement settlement to unsecure unsecured d creditors. creditors.
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Chapter 20 - Corporations in Financial Difficulty Difficulty
38. A trustee has been appointed for Smith Company, which is being liquidated under Chapter 7 of the Bankruptcy Code. The following transactions occurred after the assets were transferred to the trustee: 1. Credit sales by the trustee were $100,000. Cost of goods sold were $72,000, consisting of all the inventory transferred from Smith. 2. The trustee sold all $20,000 worth of marketable securities for $15,000. 3. Receivables collected by the trustee: Old: $28,000 of the $50,000 transferred New: $65,000 $65,000 4. Disbursements by the trustee: Old current payables: $31,000 of the $65,000 transferred Trustee's expenses: $6,000 5. Recorded $24,000 depreciation on the plant assets of $120,000 transferred from Smith. Required: Prepare a statement of realization and liquidation according to the traditional approach illustrated in the chapter.
39. Briefly explain the three classes of creditors specified in the Bankruptcy Code.
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40. To obtain cash quickly, DebCo. sold $750,000 of its receivables to Finco., with recourse. As the accountant for DebCo., what issues do you need to resolve in order to determine the appropriate accounting treatment?
Chapter 20 Corporations in Financial Difficulty Answer Answer Key Key
Multiple Choice Questions
1. What is defined as a condition in which a company is unable to meet debts as the debts mature? A. Deficit B. Liability C. Insolvency D. Credit squeeze
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
2. Under a composition agreement, A. creditors agree to accept less than the face amount of their claims. B. debtors in financial difficulty transfer assets "without recourse." C. a creditors' committee is initiated with a plan of settlement proposed by the debtor. D. the debtor petitions for relief in a bankruptcy court.
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
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Chapter 20 - Corporations in Financial Difficulty Difficulty
3. In which of the following ways can debt be restructured? I. Assets can be transferred to the creditor. II. An equity interest can be granted to the creditor. III. The terms of the debt can be modified. A. I and II only B. I and III only C. II and III only D. I, II, and III
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
4. Under which nonjudicial action do creditors agree to assist the debtor in managing the most efficient payment of creditors' claims? A. Debt restructuring arrangement B. Creditors' committee management C. Transfer of assets D. Composition agreement
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
5. A transfer of assets by a company in financial difficulty is considered a sale if: I. the transfer includes a recourse provision allowing the buyer to return the asset. II. the transferee obtains the right to pledge or exchange the transferred assets. III. the transferred assets have been isolated from the transferor. IV. the transferor does not maintain effective control over the transferred assets. A. I, II, and IV B. Both I and III C. Both I and II D. II, III, and IV
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
20-14
Chapter 20 - Corporations in Financial Difficulty Difficulty
6. Chapter 11 of the Bankruptcy Code provides for: I. Reorganization. II. Liquidation. A. I only B. II only C. Both I and II D. Neither I nor II
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
7. Chapter 7 of the Bankruptcy Code provides for: I. Reorganization. II. Liquidation. A. I only B. II only C. Both I and II D. Neither I nor II
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
8. The Bankruptcy Reform Act contains chapters which deal with: I. Individuals. II. Corporations. III. Municipal governments. A. Only I and II B. Only II and III C. Only I and III D. I, II, and III
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
20-15
Chapter 20 - Corporations in Financial Difficulty Difficulty
9. A debtor may file which type of petition when seeking judicial protection under the Bankruptcy Reform Act? I. Voluntary II. Involuntary A. I only B. II only C. Either I or II. D. Neither I nor II
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
10. Creditors may file which type of petition when seeking remedy under the Bankruptcy Code? I. Voluntary II. Involuntary A. I only B. II only C. Either I or II D. Neither I nor II
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
11. Under the Bankruptcy Code, an insolvent corporation may be: I. Reorganized. II. Liquidated. A. I B. II C. Either I or II D. Neither I nor II
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
20-16
Chapter 20 - Corporations in Financial Difficulty Difficulty
12. Which chapters of the Bankruptcy Code deal with corporations? A. Chapters 1, 3, and 5 B. Chapter 9 C. Chapters 7 and 11 D. Chapters 12 and 13
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
13. Which of the following could be true of the proceedings under Chapter 11 of the Bankruptcy Code? A. Always administered by the bankruptcy courts. B. The debtor's assets are sold and its liabilities extinguished. C. The company does not operate during this period. D. The debtor continues as a business after the reorganization.
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
14. Under Chapter 11 proceedings, what represents the fair value of the entity before considering liabilities and approximates the amount a willing buyer would pay for the entity's assets? A. Reorganization value B. Fire sale value C. Fresh start value D. Excess value
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
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Chapter 20 - Corporations in Financial Difficulty Difficulty
15. A reorganization value in excess of amounts assignable to identifiable assets is: A. not reported. B. reported as an intangible asset called Reorganization Value in Excess of Amounts Allocable to Identifiable Assets. C. reported as Goodwill Associated with Exit or Disposal Activities. D. passed on to prior shareholders of the company.
AACSB: Reflective Reflective Thinking Thinking AICPA: Reporting Reporting
16. Which of the following observations regarding the use of fresh start accounting is true? A. It is always required under Chapter 11 bankruptcy proceedings. B. Prior shareholders will have control of the emerging company. C. It results in a new reporting entity. D. It is used under Chapter 7 bankruptcy proceedings.
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
17. _____ have liens, or security interests, on specific assets. A. Secured creditors B. Creditors with priority C. Unsecured creditors D. Assured creditors
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
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Chapter 20 - Corporations in Financial Difficulty Difficulty
18. As defined by the Bankruptcy Code, creditors with priority: I. have collateral claim against specific assets. II. are unsecured creditors who have priority over other unsecured creditors. III. are the first to be paid from any proceeds available to unsecured creditors. A. I only B. II only C. I, II and II D. Both II and III
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
19. Which of the following observations concerning claims by general unsecured creditors is NOT true? true? A. They are paid only after secured creditors and unsecured creditors with priority are satisfied to the extent of any legal limits. B. They often receive less than the full amount of their claim. C. They are entitled to "preference payments" at the discretion of the debtor's management. D. The amounts to be paid to them are usually stated as a percentage of the total claim.
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
20. The payment to general unsecured creditors is often termed: A. a "preference payment." B. a "dividend." C. a "write-off." D. a "bonus."
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
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Chapter 20 - Corporations in Financial Difficulty Difficulty
21. "Preference payments" made by the debtor to one creditor to the detriment of all other creditors within 90 days before the bankruptcy petition was filed: A. is reduced from the monies available to the general unsecured creditors. B. is usually written off. C. may be recovered and returned to the cash available for all creditors. D. are not recovered, as management assurances are binding.
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
22. The accounting statement of affairs is prepared: A. at the end of the reorganization process. B. at the end of the liquidation process. C. at the beginning of the reorganization process. D. at the beginning of the liquidation process.
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
23. What is the general form of the trustee's opening entry, accepting the assets of the debtor company?
A. Option A B. Option B C. Option C D. Option D
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
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Chapter 20 - Corporations in Financial Difficulty Difficulty
24. Which monthly report shows the results of the trustee's fiduciary actions beginning at the point the the trustee trustee accepts the debtor's debtor's assets? assets? A. Statement of affairs B. Statement of realization and liquidation C. Statement of financial position D. Statement of activities
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
25. The Statement of Realization and Liquidation contains sections for all the following items except: A. assets. B. supplementary items. C. liabilities. D. stockholders equity.
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
26. In a statement of realization and liquidation, unusual revenue items are reported under: A. assets. B. extraordinary items. C. supplementary items. D. These are never reported.
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
27. All of the following items are reported in a statement of realization and liquidation except: A. Cash B. Prepaid assets C. Depreciable assets (net) D. Receiver's expenses
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
20-21
Chapter 20 - Corporations in Financial Difficulty Difficulty
28. Which of the following items are likely to be reported in the supplementary items section of a statement of realization and liquidation? A. Creditors' claims settled during the period. B. Trustee's administration fees. C. New obligations incurred by the trustee. D. Assets subsequently acquired by the trustee.
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
Orville Company recently petitioned for bankruptcy and is now in the process of preparing a statement of affairs. The carrying values and estimated fair values of the assets of Orville Company are as follows:
Debts of Orville are as follows:
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Chapter 20 - Corporations in Financial Difficulty Difficulty
29. Based on the preceding information, what is the total amount of unsecured claims? A. $113,000 B. $126,000 C. $93,000 D. $121,000
AACSB: Analytic Analytic AICPA: Measuremen Measurement t
30. Based on the preceding information, what estimated amount will be available for general unsecured creditors upon liquidation? A. $28,000 B. $93,000 C. $113,000 D. $121,000
AACSB: Analytic Analytic AICPA: Measuremen Measurement t
31. Based on the preceding information, what is the estimated dividend percentage? A. 23 percent B. 93 percent C. 77 percent D. 68 percent
AACSB: Analytic Analytic AICPA: Measuremen Measurement t
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Chapter 20 - Corporations in Financial Difficulty Difficulty
32. Eagle Company recently petitioned for bankruptcy and is now in the process of preparing a statement of affairs. The following information has been assembled for this statement:
What amount will be paid to the fully secured creditors and the creditors with priority?
A. Option A B. Option B C. Option C D. Option D
AACSB: Analytic Analytic AICPA: Measuremen Measurement t
33. A "debtor-in-possession" balance sheet is prepared for a company which: A. is having its debts restructured. B. is undergoing a liquidation under Chapter 7. C. is undergoing a reorganization under Chapter 11. D. is in bankruptcy reorganization but management still controls the company.
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
20-24
Chapter 20 - Corporations in Financial Difficulty Difficulty
34. A debtor-in-possession balance sheet should report: I. Liabilities not subject to compromise. II. Liabilities subject to compromise. A. I only B. II only C. Both I and II D. Neither I nor II
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
35. On a debtor-in-possession income statement, which of the following items should be reported under the heading "Reorganization Items"? A. Sales B. Selling expenses C. Income tax benefit D. Loss on disposal of assets
AACSB: Reflective Reflective Thinking Thinking AICPA: Decision Decision Making Making
Essay Questions
36. What are the conditions necessary for using fresh start reporting in reorganization? The conditions are: 1. The reorganization value of the assets of the emerging entity immediately before the date of confirmation is less than the total of all postpetition liabilities and allowed claims. 2. Holders of existing voting shares immediately before confirmation receive less than 50 percent of of the voting voting shares shares of the the emerging emerging entity. entity. This implies implies that that the prior prior shareholder shareholderss have lost control of the emerging company.
AACSB: Communica Communication tion AICPA: Critical Critical Thinking Thinking
20-25
Chapter 20 - Corporations in Financial Difficulty Difficulty
37. Wilbur Corporation is to be liquidated under Chapter 7 of the Bankruptcy Code. The balance sheet sheet on December December 31, 31, 2008, is as follows: follows:
The following additional information is available: 1. Marketable securities consist of 2,000 shares of Bristol Inc. common stock. The market value per share share of the stock is $8. The stock stock was pledged against against a $20,000, $20,000, 8 percent percent note note payable payable that has accrued interest of $800. 2. Accounts receivable of $40,000 are collateral for a $35,000, 10 percent note payable that has accrued interest of $3,500. 3. Inventory with a book value of $35,000 and a current value of $32,000 is pledged against accounts payable of $60,000. The appraised value of the remainder of the inventory is $50,000. 4. Only $1,000 will be recovered from prepaid insurance. 5. Land is appraised at $65,000 and plant and equipment at $160,000. 6. It is estimated that the franchises can be sold for $15,000. 7. All the wages payable qualify for priority. 8. The mortgages are on the land and on a building with a book value of $110,000 and an appraised value of $100,000. The accrued interest on the mortgages is $7,500. 9. Estimated legal and accounting fees for the liquidation are $10,000. Required a. Prepare a statement of affairs as of December 31, 2008. b. Compute Compute the estimated estimated percentag percentagee settlement settlement to unsecure unsecured d creditors. creditors.
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Chapter 20 - Corporations in Financial Difficulty Difficulty
b)
AACSB: Analytic Analytic AICPA: Measuremen Measurement t
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Chapter 20 - Corporations in Financial Difficulty Difficulty
38. A trustee has been appointed for Smith Company, which is being liquidated under Chapter 7 of the Bankruptcy Code. The following transactions occurred after the assets were transferred to the trustee: 1. Credit sales by the trustee were $100,000. Cost of goods sold were $72,000, consisting of all the inventory transferred from Smith. 2. The trustee sold all $20,000 worth of marketable securities for $15,000. 3. Receivables collected by the trustee: Old: $28,000 of the $50,000 transferred New: $65,000 $65,000 4. Disbursements by the trustee: Old current payables: $31,000 of the $65,000 transferred Trustee's expenses: $6,000 5. Recorded $24,000 depreciation on the plant assets of $120,000 transferred from Smith. Required: Prepare a statement of realization and liquidation according to the traditional approach illustrated in the chapter.
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Chapter 20 - Corporations in Financial Difficulty Difficulty
AACSB: Analytic Analytic AICPA: Measuremen Measurement t
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Chapter 20 - Corporations in Financial Difficulty Difficulty
39. Briefly explain the three classes of creditors specified in the Bankruptcy Code. The Bankruptcy Code specifies three classes of creditors whose claims have the following priorities: priorities: (1) (1) secured secured creditors, creditors, (2) creditors creditors with priority priority,, and (3) unsecure unsecured d creditors. creditors. Secured creditors have liens, or security interests, on specific assets, often called "collateral." A creditor with such a legal interest in a specific asset has the highest priority claim on that asset. Creditors with priority are unsecured creditors having no collateral claim against specific assets, who have priority over other unsecured creditors. Creditors with priority are the first to be paid from from any proceeds proceeds available available to to unsecured unsecured creditors. creditors. General unsecured creditors are paid only after secured secured creditor creditorss and unsecured unsecured creditors creditors with priority priority are are satisfied satisfied to the the extent of any legal limits. Often the general unsecured creditors receive less than the full amount of their claim.
AACSB: Communica Communication tion AICPA: Critical Critical Thinking Thinking
40. To obtain cash quickly, DebCo. sold $750,000 of its receivables to Finco., with recourse. As the accountant for DebCo., what issues do you need to resolve in order to determine the appropriate accounting treatment? Selling receivables "with recourse" means that the debtor must accept the return of any uncollectible receivables that were transferred. FASB 140, "Accounting for Transfers and Servicing of Financial Assets and extinguishment of Liabilities" specifies that a transfer of financial assets is considered a sale only if the transferor has surrendered control over the transferred assets. Selling the receivables with recourse does not remove ultimate control from the debtor.
AACSB: Communica Communication tion AICPA: Critical Critical Thinking Thinking
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