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Creation Settings Chapter 21--Debt Restructuring, Corporate Reorganizations, Reorganizations, and Liquidations
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Question Which of the following is an illustration of an action that can be ta ken to help a troubled firm without using t he court system? Ans wer
asset transfers to settle debt debt equity interest granted in exchange for debt debt modifications of interest interest rates more favorable to the the firm All or a combination can be used.
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A troubled debt restructuring is a process process whereby creditors grant concessions concessions to the debtor debtor that they would not not consider otherwise. otherwise. These actions could included accepting accepting assets or equity interest to settle debt or modification of terms of the d ebt.
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A troubled debt restructuring is a process process whereby creditors grant concessions concessions to the debtor debtor that they would not not consider otherwise. otherwise. These actions could included accepting accepting assets or equity interest to settle debt or modification of terms of the d ebt. Add Question Here Here
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Question Land and buildings having a book value of $150,000 and a fair value of $185,000 are transferred to a creditor in a troubled debt
restructuring to fully settle a loan of $200,000 plus accrued accrued interest of $3,000. What is the amount of the gain on restructuring? Ans wer
$35,000 $53,000 $15,000 $18,000
Correct Feedback
Two gains will be recognized recognized in this transaction. One is the gain on the disposal of the assets of $35,000 $35,000 (185,000 - 150,000). The gain on the troubled debt restructuring will be $18,000 which is the difference between the book value of the debt and accrued interest and the fair value of the assets received to settle the debt (203,000 - 185,000).
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Two gains will be recognized recognized in this transaction. One is the gain on the disposal of the assets of $35,000 $35,000 (185,000 - 150,000). The gain on the troubled debt restructuring will be $18,000 which is the difference between the book value of the debt and accrued interest and the fair value of the assets received to settle the debt (203,000 - 185,000). Add Question Here Here
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Question In a t roubled debt restructuring where the debtor elects to transfer an equity interest to a creditor in exchange for the satisfaction of an outstanding debt: Ans wer
the debtor may recognize a gain on restructure restructure when the market value of the equity interest is greater than the book book value of the debt plus any accrued interest the debtor may recognize a gain on restructure restructure when the market value of the equity interest is less than the book value value of the debt plus any accrued i nterest any difference between between market value of equity interest and book book value of the debt plus accrued interest must be recorded recorded in Retained Earnings. any difference between between market value of equity interest and book book value of the debt plus accrued interest must be recorded recorded in Additional Paid in Capital Capital in Excess of Par. Par.
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In a troubled debt restructuring where the debtor elects to transfer an equity interest to the creditor to satisfy an outstanding debt, the debtor records a gain on restructuring measured by the excess of the carrying basis of the debt over the fair value of the equity interest.
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In a troubled debt restructuring where the debtor elects to transfer an equity interest to the creditor to satisfy an outstanding debt, the debtor records a gain on restructuring measured by the excess of the carrying basis of the debt over the fair value of the equity interest. Add Question Here Here
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Question On January 1, 20X2, Duke Company negotiated an agreement to modify the terms of a $500,000 note with $38,000 of accrued interest.
Payments of $25,000 cash will be made each quarter end up to and including June 30, 20X6. Which of the following is true about this troubled debt restructuring? Ans wer
The $25,000 payments payments will include principal and interest. A gain of of $88,000 will be recognized. recognized. The present value of the payments payments must be calculated to determine if there is a gain or loss. None of the above is true. true.
Correct Feedback
The payments subsequent subsequent to the reorganization do not include interest. A gain will be recognized in the amount of $88,000 [538,000 - (25,000 x 18 payments)].
subsequent to the reorganization do not include interest. A gain will be recognized in the amount of $88,000 Incorrect Feedback The payments subsequent [538,000 - (25,000 x 18 payments)]. Add Question Here Here Mu l t i p l e Ch o i c e
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Question On January 1, 20X2, Duke Company negotiated an agreement to modify the terms of a $500,000 note with $38,000 of accrued interest.
Payments of $35,000 including including interest will be made each quarter end up to and including including June 30, 20X6. Which of the following is true about this troubled debt restructuring?
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Ans wer
Interest expense will be recognized as it is incurred. A gain of $88,000 will be recognized. The present value of the payments must be calculated to determine if there is a gain or loss. None of the above is true.
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Subsequent payments will include interest that will be recognized as incurred. No gain or loss will be recognized.
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Subsequent payments will include interest that will be recognized as incurred. No gain or loss will be recognized. Add Question Here
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Question Equipment with a fair value of $65,000 and a cost basis of $60,000 is transferred to a creditor in partial settlement of a debt of $150,000
plus accrued interest of $7,500. The balance of the debt will b e satisfied by 3 equal payments of $30,000 over the next three years. Which of the following journal entries best records the restructure? Ans wer
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Loan Payable Interest Payable Equipment Restructured Debt Gain on Restructure
150,000 7,500
Loan Payable Loss on Restructure Equipment Gain on Transfer of Equipment Restructured Debt
150,000 5,000
Loan Payable Interest Payable Equipment Gain on Transfer of Equipment Restructured Debt Gain on Restructure
150,000 7,500
Loan Payable Interest Payable Equipment Restructured Debt Gain on Restructure
150,000 7,500
60,000 90,000 7,500
60,000 5,000 90,000
60,000 5,000 90,000 2,500
65,000 90,000 2,500
Loan Payable Interest Payable Equipment Gain on Transfer of Equipment (1) Restructured Debt Gain on Restructure (2)
150,000 7,500 60,000 5,000 90,000 2,500
(1) Fair value - book value of equipment (65,000 - 60,000 = 5,000) (2) Book value of debt and accrued interest - (restructured debt + fair value of equipment) (150,000 + 7,500) - (90,000 + 65,000) = 2,500 Incorrect Feedback
Loan Payable Interest Payable Equipment Gain on Transfer of Equipment (1) Restructured Debt Gain on Restructure (2)
150,000 7,500 60,000 5,000 90,000 2,500
(1) Fair value - book value of equipment (65,000 - 60,000 = 5,000) (2) Book value of debt and accrued interest - (restructured debt + fair value of equipment) (150,000 + 7,500) - (90,000 + 65,000) = 2,500 Add Question Here Multiple Choice
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Question In a t roubled debt restructuring involving only the modification of terms of a loan receivable, how should the loan r eceivable be measured on the creditor’s balance sheet? Ans wer
The loan’s observable market price. The fair value of the collateral if the loan is collateral dependent. The present value of expected future cash flows at the original contractual rate. All of the above.
Correct Feedback
The fair value of the restructured loan receivable on the creditor’s balance sheet may be measured using the loan’s market price, the fair value of the collateral or the present value of expected payments.
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The fair value of the restructured loan receivable on the creditor’s balance sheet may be measured using the loan’s market price, the fair value of the collateral or the present value of expected payments. Add Question Here
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Question In a quasi-reorganization, which of the following may occur? Ans wer
Excess plant capacity may be sold Assets may be revalued to reflect impaired values Retained Earnings deficits are eliminated by changes made to the capital structure All of the above may occur
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The primary purpose of a quasi-reorganization is to eliminate a large deficit a nd take such action as will permit successful operations in the future. These actions could include the sale of excess plant and equipment, recording impairment losses on long-lived assets. The retained earnings deficit that results will be reduced to zero t hrough changes to the capital structure.
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The primary purpose of a quasi-reorganization is to eliminate a large deficit a nd take such action as will permit successful operations in the future. These actions could include the sale of excess plant and equipment, recording impairment losses on long-lived assets. The retained earnings deficit that results will be reduced to zero t hrough changes to the capital structure. Add Question Here
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Question In a quasi-reorganization, a debit balance in Retained Earnings (a deficit) is eliminated by Ans wer
reducing paid-in capital or reorganization capital. reducing future depreciation charges. issuing more capital stock. writing down assets to lower, but fair, values.
Correct Feedback In a quasi-reorganization, a deficit retained earnings balance is eliminated by changing the capital structure, usually through
reducing paid-in capital. In a quasi-reorganization, a deficit retained earnings balance is eliminated by changing the capital structure, usually through reducing paid-in capital.
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Question After eliminating the deficit i n a reorganization plan, a balance may remain in Reorganization Capital. On the balance sheet, where would
this account appear? Ans wer
part of the Paid-In Capital part of the dated balance in Retained Earnings an Intangible Asset if the balance is a debit a deferred credit amortized over a period not to exceed 40 years
Correct Feedback
The reorganization capital account would appear as part of paid-in capital in the stockholders’ equity section of the balance sheet.
Incorrect Feedback The reorganization capital account would appear as part of paid-in capital in the stockholders’ equity section of the balance
sheet. Add Question Here Multiple Choice
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Question Which of the following is not a general objective of bankruptcy procedures? Ans wer
assurance that all obligations of the debtor will be satisfied completely attempt to give the debtor a fresh start assurance of an equitable distribution of the debtor's property among creditors None of the above is a general objective.
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While an objective of bankruptcy proceedings is to assure an equitable distribution of property among creditors, it is not to assure that all of the debtor’s obligations will be satisfied completely.
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While an objective of bankruptcy proceedings is to assure an equitable distribution of property among creditors, it is not to assure that all of the debtor’s obligations will be satisfied completely. Add Question Here
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Question A voluntary bankruptcy petition can be filed under Ans wer
Chapter 7. Chapter 11. Chapter 13. All of the above chapters.
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Chapter 7 is for liquidation; chapter 11 is for reorganization and chapter 13 is for i ndividuals.
Incorrect Feedback Chapter 7 is for liquidation; chapter 11 is for reorganization and chapter 13 is for i ndividuals.
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Question A plan of reorganization may include all except which of the following? Ans wer
arrangements involving elimination of some debt identification of various classes of claims identification of a trustee in liquidations differentiation of impaired versus non-impaired interests
Correct Feedback A plan of reorganization precludes the identification of a trustee for a liquidation. Incorrect Feedback A plan of reorganization precludes the identification of a trustee for a liquidation.
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Question Which of the following is not true of a company operating as a “debtor-in-possession’ after a chapter 11 reorganization plan is approved
by the bankruptcy court? Ans wer
Provisions are binding on all creditors and security holders, whether or not they accepted the plan. Property is vested in the debtor company is free of all claims, except as stipulated under the plan. If the reorganization is not accomplishing its objective, a request for modification or conversion to a chapter 7 liquidation may be submitted to the court. If the plan contained the provision to pay accounts payable at $.50 on $1.00, and the company’s cash flow is better than expected, the amount paid could be increased.
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Once a plan is confirmed, the payment obligation on the debtor is fixed, regardless of any subsequent increase in the debtor’s cash flow.
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Once a plan is confirmed, the payment obligation on the debtor is fixed, regardless of any subsequent increase in the debtor’s cash flow. Add Question Here
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Question Which of the following are characteristics of the financial statements of a company emerging from bankruptcy under fresh-start accounting
rules?
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Ans wer
There will be no beginning retained earnings. Goodwill may be recorded. Liabilities are reported at their present value. All of the above.
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Under fresh start accounting, there will be no beginning retained earnings, assets are valued at fair value, liabilities are recorded at their present values and goodwill may be recorded.
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Under fresh start accounting, there will be no beginning retained earnings, assets are valued at fair value, liabilities are recorded at their present values and goodwill may be recorded. Add Question Here
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Question To assist the trustee in a chapter 7 bankruptcy, a debtor must Ans wer
collect and reduce to money any non-exempt property file progress reports with the court file a statement of affairs, consisting of answers to a series of questions regarding debtor's financial condition pay dividends to creditors with regards to priorities
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A debtor in a chapter 7 bankruptcy must files a statement of affairs consisting of answers to a series of stated questions about the identity of the d ebtor’s records and books, transactions, and events affecting the financial conditions of the debtor.
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A debtor in a chapter 7 bankruptcy must files a statement of affairs consisting of answers to a series of stated questions about the identity of the d ebtor’s records and books, transactions, and events affecting the financial conditions of the debtor. Add Question Here
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Question Which of the following is not a duty of a trustee in a chapter 7 liquidation? Ans wer
File proofs of claim with the bankruptcy court. Investigate the financial affairs of the debtor. Make payments to creditors as promptly as practicable with regard for priorities. File reports of progress.
Correct Feedback The chapter 7 trustee has the duty to r eview proofs of claims and disallow any improper claims; it is the duty of the creditor to
file the claim. The chapter 7 trustee has the duty to r eview proofs of claims and disallow any improper claims; it is the duty of the creditor to file the claim.
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Question Put the following classes in the order allowed by the Bankruptcy Act, starting with the highest priority to the lowest:
1) 2) 3) 4)
Expenses to administer estate Tax claims of governmental units Wages (including salaries and commissions) up to $10,000 earned within 180 days deposits up to $1,800 each for goods or services never received from the debtor
Ans wer
1,3,4,2 3,1,2,4 4,2,1,3 2,1,3,4
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In order of priority: 1. Expenses to administer the estate are given priority so competent attorneys and accountants are willing to participate. 3. Wages of up to $10,000 earned within 180 days before the filing of the petition. 4. Deposits up to $1,800 each for goods or services never received from the debtor. 2. Certain tax claims. These claims are nondischargeable.
Incorrect Feedback In order of priority:
1. Expenses to administer the estate are given priority so competent attorneys and accountants are willing to participate. 3. Wages of up to $10,000 earned within 180 days before the filing of the petition. 4. Deposits up to $1,800 each for goods or services never received from the debtor. 2. Certain tax claims. These claims are nondischargeable. Add Question Here Multiple Choice
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Question Which of the following statements is t rue? Ans wer
Certain debts are not dischargeable. The goal of liquidation is to give the company a new start. All secured claims are paid in full. The expenses to administer the estate are paid last because they are unsecured.
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Certain debts, in a bankruptcy, for instance, certain tax claims, are not dischargeable.
Incorrect Feedback Certain debts, in a bankruptcy, for instance, certain tax claims, are not dischargeable.
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The document used to estimate amounts available to each class of claims is called a(n) Ans wer
Statement of Assets and Liabilities. Legal Statement of Affairs. Accounting Statement of Affairs. Statement of Realization and Liquidation.
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Correct Feedback
The primary purpose of the statement of affairs is to approximate the estimated amount available to each class of claims. There is an asset section that focuses on realizable values of assets, as well as a li abilities section.
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The primary purpose of the statement of affairs is to approximate the estimated amount available to each class of claims. There is an asset section that focuses on realizable values of assets, as well as a li abilities section. Add Question Here
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Question Which of the following does not d escribe the accounting statement of affairs? Ans wer
the emphasis is on asset net realizable value, not historical cost the statement of affairs is concerned only with the assets of the debtor organization, not the claims the statement can also be used in a reorganization the statement of affairs is based on estimated values; actual realized values may be different
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The primary purpose of the statement of affairs is to approximate the estimated amount available to each class of claims. There is an asset section that focuses on realizable values of assets, as well as a liabilities section.
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The primary purpose of the statement of affairs is to approximate the estimated amount available to each class of claims. There is an asset section that focuses on realizable values of assets, as well as a liabilities section. Add Question Here
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Question Lakeside Bank holds a $100,000 note secured by a building owned by Fly-By-Night Manufacturing, which has filed for bankruptcy under
Chapter 7 of the Bankruptcy Code. If the property has a book value of $120,000 and a fair market value of $90,000, what is the best way to describe the note held by Second City Bank? The bank has a(n) Ans wer
secured claim of $100,000. unsecured claim of $100,000. secured claim of $90,000 and an unsecured claim of $10,000. secured claim of $100,000 and an unsecured claim of $20,000.
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The note is secured to the extent of the fair value of its collateral, in this case $90,000. The remaining balance is considered unsecured.
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The note is secured to the extent of the fair value of its collateral, in this case $90,000. The remaining balance is considered unsecured. Add Question Here
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Question In the accounting statement of affairs, the gains or losses upon liquidation would equal Ans wer
net book value of assets minus book value of liabilities. the book value of assets minus their realizable value. total estimated realizable value of assets minus the amount assigned to secured creditors. total estimated realizable value of assets minus the amount remaining for Class 7 unsecured creditors.
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In the accounting statement of affairs, the book value of the assets should equal the assets’ estimated realizable value plus (minus) the estimated loss (gain) on liquidation.
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In the accounting statement of affairs, the book value of the assets should equal the assets’ estimated realizable value plus (minus) the estimated loss (gain) on liquidation. Add Question Here
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Question A corporation's accounting statement of affairs shows a dividend of 115%. The dividend means that Ans wer
secured creditors will receive an amount in excess of the book value of their claims. unsecured creditors will receive an amount in excess of the book value of their claims. stockholders may expect some return on their interests. an error was made in the preparation of the statement.
Correct Feedback
The dividend to general unsecured creditors is not a return of equity to shareholders, but the ratio of the net proceeds available to unsecured creditors without priority divided by the total claims of unsecured creditors without priority. If the ratio exceeds 1, the realizable value of the a ssets exceeds the creditors’ claims, so the excess would be available to satisfy the claims of shareholders.
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The dividend to general unsecured creditors is not a return of equity to shareholders, but the ratio of the net proceeds available to unsecured creditors without priority divided by the total claims of unsecured creditors without priority. If the ratio exceeds 1, the realizable value of the a ssets exceeds the creditors’ claims, so the excess would be available to satisfy the claims of shareholders. Add Question Here
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Question The ratio called "dividend to general unsecured creditors" is calculated by which of the following formulas? Ans wer
Estimated amount available for unsecured creditors with/without priority divided by Total claims of all unsecured creditors with/without priority Estimated realizable value of all debtor assets divided by Book value of debtor assets Estimated gain/loss on liquidation divided by Total estimated net realizable value of debtor assets Net estimated proceeds available to unsecured creditors without priority divided by Total claims of unsecured creditors without priority.
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The dividend to general unsecured creditors is not a return of equity to shareholders, but the ratio of the net proceeds available to unsecured creditors without priority divided by the total claims of unsecured creditors without priority.
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The dividend to general unsecured creditors is not a return of equity to shareholders, but the ratio of the net proceeds available to unsecured creditors without priority divided by the total claims of unsecured creditors without priority. Add Question Here
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Question A corporation's accounting statement of affairs shows a dividend of 40%. The dividend means that Ans wer
all creditors and stockholders will receive approximately 40% of the book value of their respective interests. all creditors will receive an amount approximately equal to 40% of the book value of their claims, but stockholders will receive nothing. Unsecured claims with priority will receive 40% of the book value of their respective claims.
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Unsecured claims without priority will receive 40% of the book value of their respective claims. Correct Feedback
The dividend to general unsecured creditors is not a return of equity to shareholders, but the ratio of the net proceeds available to unsecured creditors without priority divided by the total claims of unsecured creditors without priority.
Incorrect Feedback
The dividend to general unsecured creditors is not a return of equity to shareholders, but the ratio of the net proceeds available to unsecured creditors without priority divided by the total claims of unsecured creditors without priority. Add Question Here
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Question The Statement of Realization and Liquidation differs from the Statement of Affairs because Ans wer
the Statement of Realization and Liquidation reports estimated realizable values rather than actual liquidation results. the Statement of Realization and Liquidation is a summary of secured debt activity only. the Statement of Realization and Liquidation is prepared only at final completion of the liquidation process. the Statement of Realization and Liquidation reports actual liquidation results rather than estimated realizable values. The Statement of Realization and Liquidation reports the actual liquidation results. It is a report on the activities of the trustee made periodically to the bankruptcy court.
Correct Feedback
The primary purpose of the Statement of Affairs is to approximate the estimated amount available to each class of claims. There is an asset section that focuses on realizable values of assets, as well as a liabilities section. The Statement of Realization and Liquidation reports the actual liquidation results. It is a report on the activities of the trustee made periodically to the bankruptcy court.
Incorrect Feedback
The primary purpose of the Statement of Affairs is to approximate the estimated amount available to each class of claims. There is an asset section that focuses on realizable values of assets, as well as a liabilities section. Add Question Here Multiple Choice
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Question The document used by a trustee to report periodically on the status of fiduciary activities is called a(n) Ans wer
Statement of Assets and Liabilities. Legal Statement of Affairs. Accounting Statement of Affairs. Statement of Realization and Liquidation.
Correct Feedback
The statement of realization and liquidation reports the actual liquidation results. It is a report on the activities of the trustee made periodically to the bankruptcy court.
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The statement of realization and liquidation reports the actual liquidation results. It is a report on the activities of the trustee made periodically to the bankruptcy court. Add Question Here
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Question Equipment with a book values of $120,000 is sold in a liquidation process for cash of $110,000. This equipment was security for a
$150,000 bank loan. Any remainder is consider unsecured without priority. How would this transaction be reported on the Statement of Realization and Liquidation? Ans wer
A reduction in noncash assets of $120,000 A loss reported to owner's equity of $10,000 A disbursement of cash to the bank of $110,000, a reduction in partially secured liability of $150,000, and an increase in unsecured without priority liability of $40,000 all of the above would occur
Correct Feedback
The sale of the assets would result both in a reduction of the noncash assets of $120,000 and a loss of $10,000 on those assets (110,000 - 120,000). The $110,000 payment to the bank would reduce the partially secure d liability to $40,000 and that amount would then be transferred to unsecured without priority, bringing the partially secured liability to zero.
Incorrect Feedback
The sale of the assets would result both in a reduction of the noncash assets of $120,000 and a loss of $10,000 on those assets (110,000 - 120,000). The $110,000 payment to the bank would reduce the partially secure d liability to $40,000 and that amount would then be transferred to unsecured without priority, bringing the partially secured liability to zero. Add Question Here
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Question Hogan, Inc. is a telecommunications company. Currently, Hogan is experiencing difficulty in servicing its long-term debt. The corporation
has obtained permission from its creditors to restructure outside of the court system with t he following transactions: a.
A piece of equipment that had cost Hogan $95,000 and had $19,000 of accumulated depreciation was transferred to a creditor in full settlement of a $45,000 note with $2,250 of accrued interest.
b.
2,000 shares of $2 par value common stock were issued to a creditor in full payment of a $80,000 loan, plus accrued interest of $800. The stock was selling for $30 per share on the date of exchange.
c.
A loan with a book value of $50,000 and accrued interest of $1,000 was restructured so that three annual installments of $12,000 will satisfy both the principal and interest in full.
Required: Prepare the necessary journal entries to record these transactions in the journal of Hogan. Ans wer
a.
b.
c.
Loss on Transfer Notes Payable Accrued Interest Payable Accumulated Depreciation Equipment
28,750 45,000 2,250 19,000
Loan Payable Accrued Interest Payable Common Stock Paid-In Capital in Excess of Par Gain on Restructuring
80,000 800
Loan Payable Accrued Interest Payable
50,000 1,000
95,000
4,000 56,000 20,800
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Restructured Loan Payable Gain on Restructuring
36,000 15,000 Add Question Here
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Question Zenato's Corporation is a chain of sandwich shops that has recently had difficulty meeting its long-term debt requirements. In order to
avoid court proceedings, the firm's creditors agreed to the following debt restructuring in December, 20X1: a.
A $50,000 note would be fully satisfied with a single $40,000 payment on March 1, 20X2. The note had accrued interest of $2,000 on December 1, 20X1.
b.
A $75,000 note with accrued interest of $3,000 will be fully satisfied with $35,000 payments on December 1, 20X2 and December 1, 20X3. The original interest rate on the note was 12%.
c.
A $40,000 note with no accrued interest will be satisfied with payments of $23,048 on December 1, 20X2 and December 1, 20X3. The old note carried a 15% interest rate. The effective rate on the restructured note is 10%.
Required: Prepare the journal entries to record the restructuring and payments of the notes. Ans wer
a.
December 1, 20X1 Notes Payable Accrued Interest Payable Restructured Note Payable Gain on Restructuring
50,000 2,000 40,000 12,000
March 1, 20X2 Restructured Note Payable Cash b.
c.
40,000 40,000
December 1, 20X1 Notes Payable Accrued Interest Payable Restructured Note Payable Gain on Restructuring
75,000 3,000 70,000 8,000
December 1, 20X2 Restructured Notes Payable Cash
35,000
December 1, 20X3 Restructured Notes Payable Cash
35,000
December 1, 20X1 Notes Payable Restructured Notes Payable
40,000
December 1, 20X2 Restructured Notes Payable Interest Expense ($40,000 ´ 10%) Cash
19,048 4,000
December 1, 20X3 Restructured Notes Payable Interest Expense ($40,000 – 19,048) ´ 10% Cash
20,953 2,095
35,000
35,000
40,000
23,048
23,048 Add Question Here
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Question Following is the balance sheet of Tontoe Corporation on July 1, 20X5, just prior to obtaining the required stockholder approval to undergo
a quasi-reorganization: Tontoe Corp. Balance Sheet July 1, 20X5 Assets Current Assets: Cash Accounts receivable Inventory
$
5,000 110,000 105,000 $220,000
Property, plant, and equipment: Land Plant and equipment Less accumulated depreciation Total assets
$ 50,000 $200,000 (120,000)
80,000
130,000 $350,000
Liabilities and Stockholders' Equity Current Liabilities: Accounts payable Long-term Liabilities: Notes payable Common stock ($10 par) Paid in excess of par Retained earnings (deficit) Total liabilities and stockholders' equity. Required:
$100,000 190,000 $50,000 25,000 (15,000)
60,000 $350,000
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Prepare the journal entries necessary to record the following items that were part of the quasi-reorganization: a.
Inventory is to be reduced to its fair market value of $90,000.
b.
The plant and equipment is to be revalued to $70,000 through the Accumulated Depreciation account.
c.
Par value of the stock is reduced to $1 per share and the deficit is eliminated.
Ans wer
a.
b.
c.
Retained Earnings Inventory
15,000
Retained Earnings Accumulated Depreciation
10,000
Common Stock ($10 par) Common Stock ($1 par) Reorganization Capital *
50,000
15,000
10,000
5,000 45,000
Reorganization Capital * Retained Earnings (15,000 + 15,000 + 10,000) * also known as Paid-In Capital from Reduction in Stock Par Value
40,000 40,000 Add Question Here
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Question Wayne Corporation, a manufacturer of f arm machinery, had poor financial results last year because of a drought. Back orders indicate
complete recovery this year. To eliminate a deficit that increased when the books were closed at th e end of last year, the corporation has received stockholders' and state approval to conduct a quasi-reorganization on January 2. Required: Prepare journal entries as of January 2 to record the quasi-reorganization and the stockholders' equity section of its balance sheet immediately thereafter. The f ollowing data are pertinent: a.
Inventory at year-end is shown at FIFO cost of $280,000. Inventory is to be valued at replacement cost of $250,000.
b.
Property, plant, and equipment are shown in the records at $4,000,000, net of accumulated depreciation. They are to be written down to fair value of $3,100,000.
c.
Stockholders' equity consists of: Common stock ($10 par) 400,000 shares issued and outstanding Additional paid-in capital Retained earnings (deficit). Total stockholders' equity
$4,000,000 100,000 (2,600,000) $1,500,000
Par value of stock is to be reduced from $10 to $1 per share. Paid-in capital related to the former stock is to be canceled. d.
The deficit is to be eliminated.
Ans wer
a.
b.
c.
d.
Retained Earnings Inventory To reduce inventory from FIFO cost to market.
30,000
Retained Earnings Accumulated Depreciation (or Property, plant, and equipment) To reduce fixed assets to fair value.
900,000
30,000
900,000
Common Stock ($10 par) Additional Paid-in Capital Common Stock ($1 par) Reorganization Capital To record issuance of $1 par to replace $10 par and its additional paid-in capital
4,000,000 100,000
Reorganization Capital Retained Earnings (2,600,000 + 30,000 + 900,0000 To eliminate the deficit.
3,530,000
400,000 3,700,000
3,530,000 Add Question Here
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Question Below is a li st of unsecured items that may arise during a Chapter 7 liquidation.
a.
Wages up to $4,000 earned within 90 days before the filing.
b.
Tax claims of a government unit.
c.
Debts incurred after commencement of involuntary bankruptcy but before the order for relief.
d.
Claims of general creditors not granted priority.
e.
Deposits up to $1,800 each for goods or services never received from the debtor.
f.
Expenses to administer the estate.
g.
Unpaid contributions to employee benefit plans arising from service performed up to 180 days before filing, up to $4,000 per employee covered.
Required: Reorder the list of unsecured items by the priority they will receive to meet unsecured claims from amounts available.
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Ans wer
1.
f.
Expenses to administer the estate.
2.
c.
Debts incurred after commencement of involuntary bankruptcy but before the order for relief.
3.
a.
Wages up to $4,000 earned 90 days before the filing.
4.
g.
Unpaid contributions to employee benefit plans.
5.
e.
Deposits up to $1,800.
6.
b.
Tax claims of a government unit.
7.
d.
Claims of general creditors not granted priority. Add Question Here
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Question Kentucky Blue, Inc., a lawn care service corporation, is in serious financial difficulty with a deficit of $2,100,000. The company's plant and
equipment were designed for highly specialized products and activities. Therefore, they would yield only a small fraction of their book value upon sale. Creditors realize that they will receive little if the corporation is dissolved. In view of the renewed interest in professional lawn care, a plan of reorganization under Chapter 11 was adopted and received the necessary approvals. Required: Prepare journal entries to record the following stipulations of the plan: a.
Replace the 14% first mortgage bonds with face value of $300,000, on which there is $13,000 of unamortized premium, with 10% interest bonds, with a face value of $250,000. To cover the accrued interest of $42,000 on the 14% bonds, bondholders will receive 20,000 shares of new $1 par common stock.
b.
Unsecured accounts and notes payable total $200,000. Creditors have agreed to accept $0.55 on the dollar.
c.
Replace the 10%, $100 par, cumulative participating preferred stock (of which 10,000 shares are outstanding, having a related paid-in capital in excess of par of $170,000) with an equal number of shares of 8%, $40 par, noncumulative nonparticipating preferred stock. The corporation will no longer be liable for the $100,000 of undeclared dividends in arrears on the 10% preferred stock.
d.
Replace the 200,000 shares of $10 par common stock, having a discount of $80,000, with an equal number of $1 par common shares.
e.
El im in ate the def ici t.
Ans wer
a.
b.
c.
d.
e.
First Mortgage 14% Bonds Payable Unamortized Premium on 14% Bonds 10% Bonds Payable Reorganization Capital To replace 14% bonds with 10% bonds.
300,000 13,000
Accrued interest on 14% Bonds Payable Common Stock ($1 par) Reorganization Capital To substitute 20,000 shares of common for accrued interest.
42,000
Accounts and Notes Payable Reorganization Capital Creditors accepted plan to pay $.55 on the Dollar.
90,000
10% Cumulative Participating Preferred Stock Paid-in Capital in Excess of Par on Preferred 8% Noncumulative Nonparticipating Preferred Stock Reorganization Capital To replace $100 par preferred with $40 par preferred stock.
250,000 63,000
20,000 22,000
90,000
1,000,000 170,000 400,000 770,000
Common Stock ($10 par) Discount on Common Stock Common Stock ($1 par) Reorganization Capital To record replacement of common stock.
2,000,000
Reorganization Capital Retained Earnings To eliminate the deficit.
2,100,000
80,000 200,000 1,720,000
2,100,000 Add Question Here
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Question Rockee Corporation, a bio-tech firm, has found itself in financial difficulty and may file for bankruptcy. Rockee's Statement of Affairs
reflects the following summary information: Book value of assets Net realizable value of assets Total liabilities Secured claims Unsecured claims with priority Required: Compute the following: a.
The deficiency traceable to unsecured creditors with priority
b.
The dividend to general unsecured creditors without priority.
$700,000 370,000 400,000 250,000 30,000
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c.
Rockee owes Flint Corporation $9,000 secured by inventory that is expected to realize $7,000. How much can Flint expect to receive on this claim? a.
Ans wer
Book value of assets Net realizable of assets
$700,000 370,000 $330,000
Less stockholders' equity ($700,000 – $400,000) Deficiency b.
300,000 $ 30,000
Dividend
on $1.00
c.
$7,000 + [($9,000 – $7,000) ´ .75] = $8,500 Add Question Here
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Question On June 1, 20X5, the books of Hallow Corporation show assets with book values and realizable values as follows:
Assets Book Value $ 10,000 100,000 140,000 600,000 400,000 $1,250,000
Cash Receivables (net) Inventory Land and building (net) Equipment (net) Totals
Realizable Value $ 10,000 50,000 100,000 650,000 100,000 $910,000
Hallow's books show the following liabilities: Liabilities Book Value $ 260,000 10,000 20,000 30,000 20,000
Accounts payable Wages payable (eligible for priority) Taxes payable Accrued interest on notes payable Accrued interest on mortgage payable Notes payable (secured by receivables and inventory) Mortgage payable (secured by land and building) Total
500,000 300,000 $1,140,000
Required: a.
Prepare a schedule to determine the amount available for unsecured claims without priority.
b.
Determine the dividend to unsecured claims without priority.
c.
What amount are the note holders likely to receive? What is their dividend?
Ans wer
a.
Total estimated proceeds Less asset proceeds claimed by secured creditors: Notes payable and interest (from proceeds of receivables and inventory) Mortgage payable and interest (from proceeds of land and building) Total available to unsecured claimants. Less distributions to unsecured claims with priority: Wages payable Taxes payable Amount available for Class 7 unsecured claims
b.
$910,000
$150,000 320,000
470,000 $440,000
$ 10,000 20,000
30,000
$410,000
Unsecured portion of notes payable and interest ($500,000 + $30,000 – $150,000) Accounts payable
$380,000 260,000
Total claims of unsecured creditors without priority
$640,000
Dividend to unsecured creditors: $410,000 ÷ $640,000 = 64.1% c.
Unsecured portion of notes payable and interest Dividend on unsecured amount Amount received on unsecured portion Proceeds from receivables and inventory Total Received
$380,000 64.1% $243,580 150,000 $393,580
´
Dividend to note holders: $393,580 ÷ $530,000 = 74.3% Add Question Here Essay
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Question On June 1, 20X5, the books of Dremer Corporation show assets with book values and realizable values as follows:
Assets
Realizable Value $ 1,850 17,000 15,000 20,000 15,000 92,800 8,000 $169,650
Book Value $ 1,850 21,200 15,000 41,000 5,800 98,500 43,000 $226,350
Cash Accounts Receivable (net) Note Receivable Inventory Investment in Calandir Stock Land and Building (net) Equipment (net) Totals Dremer's books show the following liabilities: Liabilities
Book Value Accounts payable (50,000 secured by inventory and equipment) Wages payable (eligible for priority) Other Accrued Liabilities Accrued interest on notes payable Accrued interest on mortgage payable Notes payable (secured by Investment in Calandir Stock) Mortgage payable (secured by land and building) Total
$ 90,625 3,775 10,000 375 600 10,000 70,000 $185,375
Prepare an accounting Statement of Affairs including the computation of the dividend to the unsecured creditors without priority. Ans wer
Dremer Corporation Statement of Affairs June 1, 20X5
Book Value Assets Asse ts pledged with fully secur ed cr editor s: $ 98,500 Land and Bldg 5,800 Investment in Calandir Total Assets pledged with partially secured creditors: $ 41,000 Inventory 43,000 Equipment
$
1,850 21,200 15,000
Free Assets: Cash Accounts Rec Note Rec
Estimated Net Realizable Value $ 92,800 15,000 107,800
Estimated Amt Avail for Unsecured Creditors $22,200 4,625
(5,700) 9,200
$ 20,000 8,000
$
(21,000) (35,000)
1,850 17,000 15,000
$ 1,850 17,000 15,000
Estimated Amount Avail for unsecured creditors with and without priority Less unsecured creditors with priority Estimated amounts for unsecured creditors without priority: Net Realizable Amount Avail _______ Deficiency _________ $226,350 $169,650
$60,675 (3,775)
Estimated Secured Amount
BookLiabilities Valueand Owners Equity Fully Secured Creditors: $ 600 Accrued Mtg Interest 70,000 Mortgage Payable 375 Accrued N/P Interest 10,000 Note Payable Total
Estimated Gain or (Loss)on Liquidation
0 (4,200) 0
$56,900 15,725 $72,625
_______ $(56,700)
Estimated Unsecured Amount With Without Priority Priority
$
600 70,000 375 10,000 $ 80,975
Partially Secured Creditors: 50,000 Accounts Payable
$ 28,000
Unsecured Creditors with Priority: 3,775 Accrued Payroll
$22,000
$ 3,775
Unsecured creditors without Priority: 40,625 Accounts Payable 10,000 Other Accrued Liabilities $185,375 Totals $ 40,975 Owner Equity $226,350
$108,975
$40,625 $10,000 $72,625
$ 3,775
Dividend
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12 of 15
Question As of June 30, 20X4, the Lillie Corporation has the following assets, liabilities, and owners' equity:
Assets
Book Value $ 10,000 30,000 40,000 100,000 50,000 140,000 105,000 40,000 $515,000
Liabilities and Owners' Equity
Book Value $100,000 10,000 20,000 30,000 200,000 200,000 201,000 (246,000) $515,000
Cash Marketable securities Accounts receivable (net) Inventories Land Buildings (net) Machinery (net) Goodwill Total
Accounts payable Accrued income tax Accrued mortgage interest Accrued salaries expense Mortgage payable Common stock ($10 par) Additional Paid-in capital Deficit Total The following is provided:
Marketable securities have a market value of $24,000. Accounts receivable are estimated to produce $30,000. The sale of inventories should yield $120,000, $20,000 of which must be assigned to a creditor (account payable) who is owed $24,000. The land and buildings can be sold for $222,000 with the buyer assuming the mortgage and its unpaid interest. The machinery will realize $50,000. All salaries qualify for priority. Required: Prepare a statement of affairs including the calculation of the dividend to the unsecured claims without priority. Ans wer
Lillie Corporation Statement of Affairs June 30, 20X4
Book ValueAssets Assets pledged with fully secured creditors: $190,000 Land and buildings (net) (1) Assets pledged with partially secured creditors: (2) 100,000 Inventories Free assets: 10,000 Cash 30,000 Marketable securities 40,000 Accounts receivable (net) 105,000 Machinery (net) 40,000 Goodwill
Estimated Net Realizable Value $222,000
2,000
$32,000
120,000
100,000
20,000
10,000 24,000 30,000 50,000 0
10,000 24,000 30,000 50,000 0
0 (6,000) (10,000) (55,000) (40,000)
Estimated amount available for unsecured creditors with and without priority Less unsecured creditors with priority Estimated amounts for unsecured creditors without priority: Net realizable amount available Deficiency (excess) $515,000Totals
Book ValueLiabilities and Owners' Equity Fully secured creditors: $ 20,000 Accrued mortgage interest 200,000 Mortgage payable Total
24,000
30,000 10,000
Partially secured creditors: Accounts payable Total
$456,000
Estimated Secured Amount
Dividend to Class 7 unsecured creditors: $80,000 ÷ $80,000
$
216,000 (40,000)
176,000 (96,000) $ 80,000
$(59,000)
Estimated Unsecured Amount With Priority Without Priority
$ 20,000 200,000 $220,000
$ 20,000 $ 20,000
Unsecured creditors with priority: Wages payable Accrued income taxes
Unsecured creditors without priority: 76,000 Accounts payable $360,000Totals 155,000Owners' equity $515,000
Estimated Amount Available for Estimated Gain or Unsecured (Loss) on Creditors Liquidation
4,000
$30,000 10,000
$240,000
76,000 $80,000
$40,000
100% (maximum of 100%)
(1) Land and buildings available for unsecured creditors: fair value of 222,000 - mortgage and interest of 200,000 + 20,000. The estimated gain is fair value of 222,000 - book value of 190,000. (2) Assets pledged with partially secured creditors, amount available for unsecured creditors: realizable value of 120,000 - 20,000 assigned to a creditor; gain or loss = 120,000 - book value of 100,000. Add Question Here Essay
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Question On June 1, 20X5, the books of Dremer Corporation show assets with book values and realizable values as follows:
Assets
Realizable Value $ 1,850 17,000 15,000 20,000 15,000 92,800 8,000 $169,650
Book Value $ 1,850 21,200 15,000 41,000 5,800 98,500 43,000 $226,350
Cash Accounts Receivable (net) Note Receivable Inventory Investment in Calandir Stock Land and Building (net) Equipment (net) Totals Dremer's books show the following liabilities: Liabilities
Book Value Accounts payable (50,000 secured by inventory and equipment) Wages payable (eligible for priority) Other Accrued Liabilities Accrued interest on notes payable Accrued interest on mortgage payable Notes payable (secured by Investment in Calandir Stock) Mortgage payable (secured by land and building) Total
$ 90,625 3,775 10,000 375 600 10,000 70,000 $185,375
Using the following information, prepare a Statement of Realization and Liquidation for Dremer Inc. for the period of 6/1/X5 to 6/30/X5. No subsequent discoveries Sale of Calandir Securities at a market value of $16,000 Collection of Note Receivable into cash $15,000 Sale of Equipment at $7,000 Sale of Inventory at $22,000 Partial Payment of Accounts Payable $29,000 Payment of Note Payable $10,375 Ans wer
Dremer Corporation Statement of Realization and Liquidation For the period 6/1/X5 to 6/30/X5 Liabilities
6/1/X5 Balances:
Cash Receipts: Securities Sale N/R Collected Equipment Sale Inventory Sale Cash Disbursements: Bank Loan ** Part Pmt-A/P 6/30/X5 Balance
Assets Cash Noncash 1,850
224,500
16,000 15,000 7,000 22,000
(5,800) (15,000) (43,000) (41,000)
(10,375) (29,000) 22,475
Fully Secured
Partial Secured
80,975
50,000
Unsecured With Without Priority Priority 3,775
*50,625
Owners' Equity 40,975
10,200 0 (36,000) (19,000)
(10,375) 119,700
70,600
(50,000) 0
3,775
21,000 71,625
(3,825)
* AP of 90,625 - secured portion of 50,000 + other accrued liabilities of 10,000 ** Note payable of 10,000 + accrued interest of 375 Add Question Here Essay
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Question Mallory Corporation is being liquidated under Chapter 7 of the Bankruptcy Act. On May 1, 20X5, you are appointed the court's trustee for
the liquidation. The book values for assets and liabilities, on May 1, 20X5, were as follows: Cash Accounts receivable (net) Inventories Land and building (net) Machinery (net) Accounts payable Salaries payable (eligible for priority) Income tax payable Trustee's fee payable Mortgage payable Bank loan payable
$
4,000 80,000 200,000 340,000 100,000 180,000 60,000 14,000 20,000 240,000 90,000
During May through July of 20X5, the following occurred: The mortgage is secured by the land and building and the bank loan is secured by the machinery. The accounts payable are secured by the inventories. Three-fourths of the accounts receivable were collected. Of the remaining accounts, $10,000 are believed to be uncollectible. The inventories were sold for $170,000. The land and building were sold for $20,000 and assumption of the mortgage. The machinery sold for $70,000 and the proceeds were remitted to the bank.
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Salaries payable and $170,000 of the accounts payable were paid. Required: Complete Figure 21-A: Statement of Realization and Liquidation for May, June, and July of 20X5. Figure 21-A
Mallory Corporation Statement of Realization and Liquidation For the Three Months Ended July 31, 20X5 Assets Assets Beginning balances assigned 5/1/X5 Cash Receipts: Collection of accounts receivable Sale of inventory Sale of land and building Sale of machinery Cash Disbursements: Payment of salaries payable Partial payment of accounts pay Partial payment of bank loan Ending balances
Cash
Non-Cash $720,000
$4,000
(continued)
Fully Secured
Assets Beginning balances assigned 5/1/X5 Cash Receipts: Collection of accounts receivable Sale of inventory Sale of land and building Sale of machinery Cash Disbursements: Payment of salaries payable Partial payment of accounts pay Partial payment of bank loan Ending balances
Partially Secured
Liabilities Unsecured With Without Priority Priority
Owner's Equity
Ans wer Figure 21-A
Mallory Corporation Statement of Realization and Liquidation For the Three Months Ended July 31, 20X5 Assets Assets Beginning balances assigned 5/1/X5 Cash Receipts: Collection of accounts receivable Sale of inventory Sale of land and building Sale of machinery Cash Disbursements: Payment of salaries payable Partial payment of accounts pay. Partial payment of bank loan Ending balance
Cash $ 4,000
Non-Cash $720,000
60,000 170,000 20,000 70,000
(70,000) (200,000) (340,000) (100,000)
(60,000) (170,000) (70,000) $24,000
$ 10,000 (continued)
Fully Secured $240,000
Assets Beginning balances assigned 5/1/X5 Cash Receipts: Collection of accounts receivable Sale of inventory Sale of land and building Sale of machinery Cash Disbursements: Payment of salaries payable Partial payment of accounts pay Partial payment of bank loan Ending balances
Partially Secured $270,000
Liabilities Unsecured With Without Priority Priority $94,000 $ 0
Owner's Equity $120,000 (10,000) (30,000) (80,000) (30,000)
(240,000)
(60,000)
$
$ 0
(180,000) (90,000) $ $ 0
$34,000
10,000 20,000 $30,000
$ $(30,000)
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Question Describe the options that are available to a corporation that is unable to service its debts on a timely basis but that does NOT require court
action. Ans wer Several remedies are available to a corporation who wants to avoid court action. One such way is a troubled debt restructuring. This is a
process where creditors grant special concessions to the debtor. The most common forms of restructuring are: Transfer of Assets to settle a debt Granting an equity interest in settlement of a debt Modification of terms, either payments, interest, principal, or a combination A corporation can also combine the methods listed above. Gains or losses can be recognized on the transfer of assets and gains can also be recognized on the restructure process itself. Add Question Here Essay
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Question Fresh-start accounting must be adopted by certain debtors emerging from chapter 11 bankruptcy.
1) 2)
When is fresh start accounting required? What are some of the characteristics of fresh-start accounting?
Ans wer 1)
To determine whether an entity is required to adopt fresh start accounting, it must first determine its “reorganized value.” This value is the fair value of the assets of the reorganized entity plus the net realizable value of assets to be disposed of before the reorganization. The reorganized value approximates the amount a willing buyer would pay for the entity’s assets immediately after restructuring. It is generally based on discounted future cash flows for the reorganized entity and from the expected cash proceeds traceable to assets not required in the reorganized entity. Fresh-start accounting will be required if (a) the reorganized value, immediately before the reorganization is confirmed, is less than the value of the l iability claims against the entity, and (b) original voting shareholders retain less than 50% of the voting shares of the reorganized entity. 2)
As a result of fresh-start accounting, the following should occur: a) The reorganization value should be allocated to the entity’s tangible and intangible assets, including goodwill. b) Liabilities other than deferred taxes should be reported at their present values based on appropriate current interest rates. c) Benefits realized from the application of prepetition net operating losses should be given special accounting treatment, possibly impacting goodwill and paid-in capital in excess of par. d) The new reorganized fresh-start entity should have no beginning retained earnings or deficit. e) Notes to the financial statements should disclose various information regarding the fresh-start. Add Question Here Essay
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Question Describe the duties of the trustee in a Chapter 7 liquidation. Ans wer Chapter 7 requires that a court appoint a tr ustee which can be changed by the creditors. The trustee's duties are extensive including:
a. b. c. d. e. f. g. h.
Sell the non-exempt property of the estate to convert to cash Account for all cash received and disbursed; account for any property received. Investigate the financial affairs of the debtor, including any forms filed by the debtor Examine proofs of claim and disallow any improper claim Furnish information requested by a party of interest, where reasonable Operate the business of the debtor if authorized to do so by the court. Pay dividends to creditors as promptly as possible, with regard for priorities File progress reports on liquidation and a final report with detailed statement of receipts and disbursements Add Question Here
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Question Differentiate by function the Accounting Statement of Affairs and the Statement of Realization and Liquidation. Ans wer The Accounting Statement of Affairs is used primarily to report the estimated amounts available to each class of creditor during a liquidation
or re organization. The Statement of Realization and Liquidation is a legal form filed by a trustee to inform the court of the fiduciary's activities during a specified period. Add Question Here
