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Question Which of the following is an illustration of an action that can be taken to help a troubled firm without using the court system?
Answer asset transfers to settle debt
equity interest granted in exchange for debt
modifications of interest rates more favorable to the firm
All or a combination can be used.
Correct A troubled debt restructuring is a process whereby creditors grant concessions to the debtor that they would not consider otherwise.
Feedback These actions could included accepting assets or equity interest to settle debt or modification of terms of the debt.
Incorrect A troubled debt restructuring is a process whereby creditors grant concessions to the debtor that they would not consider otherwise.
Feedback These actions could included accepting assets or equity interest to settle debt or modification of terms of the debt.
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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 interest of $3,000. What is the amount of the gain on restructuring?
Answer $35,000
$53,000
$15,000
$18,000
Correct Two gains will be recognized in this transaction. One is the gain on the disposal of the assets of $35,000 (185,000 - 150,000). The
Feedback 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).
Incorrect Two gains will be recognized in this transaction. One is the gain on the disposal of the assets of $35,000 (185,000 - 150,000). The
Feedback 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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Question In a troubled debt restructuring where the debtor elects to transfer an equity interest to a creditor in exchange for the satisfaction of an
outstanding debt:
Answer the debtor may recognize a gain on restructure when the market value of the equity interest is greater than the book value of
the debt plus any accrued interest
the debtor may recognize a gain on restructure when the market value of the equity interest is less than the book value of the
debt plus any accrued interest
any difference between market value of equity interest and book value of the debt plus accrued interest must be recorded in
Retained Earnings.
any difference between market value of equity interest and book value of the debt plus accrued interest must be recorded in
Additional Paid in Capital in Excess of Par.
Correct In a troubled debt restructuring where the debtor elects to transfer an equity interest to the creditor to satisfy an outstanding debt, the
Feedback 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.
Incorrect In a troubled debt restructuring where the debtor elects to transfer an equity interest to the creditor to satisfy an outstanding debt, the
Feedback 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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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?
Answer The $25,000 payments will include principal and interest.
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.
Correct Feedback The payments 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)].
Incorrect Feedback The payments 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)].
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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 interest will be made each quarter end up to and including June 30, 20X6. Which of the following is true about this
troubled debt restructuring?
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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 be satisfied by 3 equal payments of $30,000 over the next three years. Which of the
following journal entries best records the restructure?
Answer Loan Payable 150,000
Interest Payable 7,500
Equipment 60,000
Restructured Debt 90,000
Gain on Restructure 7,500
Loan Payable 150,000
Loss on Restructure 5,000
Equipment 60,000
Gain on Transfer of Equipment 5,000
Restructured Debt 90,000
Loan Payable 150,000
Interest Payable 7,500
Equipment 60,000
Gain on Transfer of Equipment 5,000
Restructured Debt 90,000
Gain on Restructure 2,500
Loan Payable 150,000
Interest Payable 7,500
Equipment 65,000
Restructured Debt 90,000
Gain on Restructure 2,500
Correct Feedback Loan Payable 150,000
Interest Payable 7,500
Equipment 60,000
Gain on Transfer of Equipment (1) 5,000
Restructured Debt 90,000
Gain on Restructure (2) 2,500
Question In a troubled debt restructuring involving only the modification of terms of a loan receivable, how should the loan receivable be measured
on the creditors balance sheet?
Answer The loans 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 The fair value of the restructured loan receivable on the creditors balance sheet may be measured using the loans market price,
Feedback the fair value of the collateral or the present value of expected payments.
Incorrect The fair value of the restructured loan receivable on the creditors balance sheet may be measured using the loans market price,
Feedback the fair value of the collateral or the present value of expected payments.
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Question After eliminating the deficit in a reorganization plan, a balance may remain in Reorganization Capital. On the balance sheet, where would
this account appear?
Answer 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.
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Question A plan of reorganization may include all except which of the following?
Answer 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?
Answer 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 companys cash flow is better than
expected, the amount paid could be increased.
Correct Once a plan is confirmed, the payment obligation on the debtor is fixed, regardless of any subsequent increase in the debtors
Feedback cash flow.
Incorrect Once a plan is confirmed, the payment obligation on the debtor is fixed, regardless of any subsequent increase in the debtors
Feedback cash flow.
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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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Question Put the following classes in the order allowed by the Bankruptcy Act, starting with the highest priority to the lowest:
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.
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.
Question
The document used to estimate amounts available to each class of claims is called a(n)
Answer Statement of Assets and Liabilities.
Legal Statement of Affairs.
Accounting Statement of Affairs.
Statement of Realization and Liquidation.
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Correct The primary purpose of the statement of affairs is to approximate the estimated amount available to each class of claims. There is
Feedback an asset section that focuses on realizable values of assets, as well as a liabilities section.
Incorrect The primary purpose of the statement of affairs is to approximate the estimated amount available to each class of claims. There is
Feedback an asset section that focuses on realizable values of assets, as well as a liabilities section.
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Question Which of the following does not describe the accounting statement of affairs?
Answer 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
Correct The primary purpose of the statement of affairs is to approximate the estimated amount available to each class of claims. There is
Feedback an asset section that focuses on realizable values of assets, as well as a liabilities section.
Incorrect The primary purpose of the statement of affairs is to approximate the estimated amount available to each class of claims. There is
Feedback an asset section that focuses on realizable values of assets, as well as a liabilities section.
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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)
Answer 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.
Correct Feedback 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.
Incorrect Feedback 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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Question In the accounting statement of affairs, the gains or losses upon liquidation would equal
Answer 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.
Correct In the accounting statement of affairs, the book value of the assets should equal the assets estimated realizable value plus
Feedback (minus) the estimated loss (gain) on liquidation.
Incorrect In the accounting statement of affairs, the book value of the assets should equal the assets estimated realizable value plus
Feedback (minus) the estimated loss (gain) on liquidation.
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Question A corporation's accounting statement of affairs shows a dividend of 115%. The dividend means that
Answer 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 The dividend to general unsecured creditors is not a return of equity to shareholders, but the ratio of the net proceeds available to
Feedback unsecured creditors without priority divided by the total claims of unsecured creditors without priority. If the ratio exceeds 1, the
realizable value of the assets exceeds the creditors claims, so the excess would be available to satisfy the claims of shareholders.
Incorrect The dividend to general unsecured creditors is not a return of equity to shareholders, but the ratio of the net proceeds available to
Feedback unsecured creditors without priority divided by the total claims of unsecured creditors without priority. If the ratio exceeds 1, the
realizable value of the assets exceeds the creditors claims, so the excess would be available to satisfy the claims of shareholders.
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Question The ratio called "dividend to general unsecured creditors" is calculated by which of the following formulas?
Answer 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.
Correct The dividend to general unsecured creditors is not a return of equity to shareholders, but the ratio of the net proceeds available to
Feedback unsecured creditors without priority divided by the total claims of unsecured creditors without priority.
Incorrect The dividend to general unsecured creditors is not a return of equity to shareholders, but the ratio of the net proceeds available to
Feedback unsecured creditors without priority divided by the total claims of unsecured creditors without priority.
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Question A corporation's accounting statement of affairs shows a dividend of 40%. The dividend means that
Answer 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 The dividend to general unsecured creditors is not a return of equity to shareholders, but the ratio of the net proceeds available to
Feedback unsecured creditors without priority divided by the total claims of unsecured creditors without priority.
Incorrect The dividend to general unsecured creditors is not a return of equity to shareholders, but the ratio of the net proceeds available to
Feedback unsecured creditors without priority divided by the total claims of unsecured creditors without priority.
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Question The Statement of Realization and Liquidation differs from the Statement of Affairs because
Answer 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.
Correct The Statement of Realization and Liquidation reports the actual liquidation results. It is a report on the activities of the trustee made
Feedback periodically to the bankruptcy court.
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.
Incorrect The Statement of Realization and Liquidation reports the actual liquidation results. It is a report on the activities of the trustee made
Feedback periodically to the bankruptcy court.
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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Question The document used by a trustee to report periodically on the status of fiduciary activities is called a(n)
Answer Statement of Assets and Liabilities.
Legal Statement of Affairs.
Accounting Statement of Affairs.
Statement of Realization and Liquidation.
Correct The statement of realization and liquidation reports the actual liquidation results. It is a report on the activities of the trustee made
Feedback periodically to the bankruptcy court.
Incorrect The statement of realization and liquidation reports the actual liquidation results. It is a report on the activities of the trustee made
Feedback periodically to the bankruptcy court.
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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?
Answer 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 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
Feedback (110,000 - 120,000). The $110,000 payment to the bank would reduce the partially secured liability to $40,000 and that amount would
then be transferred to unsecured without priority, bringing the partially secured liability to zero.
Incorrect 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
Feedback (110,000 - 120,000). The $110,000 payment to the bank would reduce the partially secured liability to $40,000 and that amount would
then be transferred to unsecured without priority, bringing the partially secured liability to zero.
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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 the 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.
Answer a. Loss on Transfer 28,750
Notes Payable 45,000
Accrued Interest Payable 2,250
Accumulated Depreciation 19,000
Equipment 95,000
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.
Answer a. December 1, 20X1
Notes Payable 50,000
Accrued Interest Payable 2,000
Restructured Note Payable 40,000
Gain on Restructuring 12,000
March 1, 20X2
Restructured Note Payable 40,000
Cash 40,000
b. December 1, 20X1
Notes Payable 75,000
Accrued Interest Payable 3,000
Restructured Note Payable 70,000
Gain on Restructuring 8,000
December 1, 20X2
Restructured Notes Payable 35,000
Cash 35,000
December 1, 20X3
Restructured Notes Payable 35,000
Cash 35,000
c. December 1, 20X1
Notes Payable 40,000
Restructured Notes Payable 40,000
December 1, 20X2
Restructured Notes Payable 19,048
Interest Expense ($40,000 10%) 4,000
Cash 23,048
December 1, 20X3
Restructured Notes Payable 20,953
Interest Expense ($40,000 19,048) 10% 2,095
Cash 23,048
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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 $ 5,000
Accounts receivable 110,000
Inventory 105,000
$220,000
Property, plant, and equipment:
Land $ 50,000
Plant and equipment $200,000
Less accumulated depreciation (120,000) 80,000 130,000
Total assets $350,000
Current Liabilities:
Accounts payable $100,000
Long-term Liabilities:
Notes payable 190,000
Common stock ($10 par) $50,000
Paid in excess of par 25,000
Retained earnings (deficit) (15,000) 60,000
Total liabilities and stockholders' equity. $350,000
Required:
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Prepare the journal entries necessary to record the following items that were part of the quasi-reorganization:
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.
Answer a. Retained Earnings 15,000
Inventory 15,000
Question Wayne Corporation, a manufacturer of farm 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 the 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 following 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.
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.
Question Below is a list of unsecured items that may arise during a Chapter 7 liquidation.
c. Debts incurred after commencement of involuntary bankruptcy but before the order for relief.
e. Deposits up to $1,800 each for goods or services never received from the debtor.
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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2. c. Debts incurred after commencement of involuntary bankruptcy but before the order for relief.
5. e. Deposits up to $1,800.
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:
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.
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:
Required:
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?
Answer a. Book value of assets $700,000
Net realizable of assets 370,000
$330,000
Less stockholders' equity
($700,000 $400,000) 300,000
Deficiency $ 30,000
b.
Dividend
on $1.00
Question On June 1, 20X5, the books of Hallow Corporation show assets with book values and realizable values as follows:
Assets
Book Value Realizable Value
Cash $ 10,000 $ 10,000
Receivables (net) 100,000 50,000
Inventory 140,000 100,000
Land and building (net) 600,000 650,000
Equipment (net) 400,000 100,000
Totals $1,250,000 $910,000
Liabilities
Book Value
Accounts payable $ 260,000
Wages payable (eligible for priority) 10,000
Taxes payable 20,000
Accrued interest on notes payable 30,000
Accrued interest on mortgage payable 20,000
Notes payable (secured by receivables and
inventory) 500,000
Mortgage payable (secured by land and building) 300,000
Total $1,140,000
Required:
a. Prepare a schedule to determine the amount available for unsecured claims without priority.
c. What amount are the note holders likely to receive? What is their dividend?
Answer a. Total estimated proceeds $910,000
Less asset proceeds claimed by secured
creditors:
Notes payable and interest (from
proceeds of receivables and inventory) $150,000
Mortgage payable and interest (from
proceeds of land and building) 320,000 470,000
Total available to unsecured claimants. $440,000
Question On June 1, 20X5, the books of Dremer Corporation show assets with book values and realizable values as follows:
Assets
Realizable
Book Value Value
Cash $ 1,850 $ 1,850
Accounts Receivable (net) 21,200 17,000
Note Receivable 15,000 15,000
Inventory 41,000 20,000
Investment in Calandir Stock 5,800 15,000
Land and Building (net) 98,500 92,800
Equipment (net) 43,000 8,000
Totals $226,350 $169,650
Liabilities
Book Value
Accounts payable (50,000 secured by inventory
and equipment) $ 90,625
Wages payable (eligible for priority) 3,775
Other Accrued Liabilities 10,000
Accrued interest on notes payable 375
Accrued interest on mortgage payable 600
Notes payable (secured by Investment in Calandir Stock) 10,000
Mortgage payable (secured by land and building) 70,000
Total $185,375
Prepare an accounting Statement of Affairs including the computation of the dividend to the unsecured creditors without priority.
Answer
Dremer Corporation
Statement of Affairs
June 1, 20X5
Free Assets:
$ 1,850 Cash $ 1,850 $ 1,850 0
21,200 Accounts Rec 17,000 17,000 (4,200)
15,000 Note Rec 15,000 15,000 0
Estimated Amount Avail for unsecured creditors with and without priority $60,675
Less unsecured creditors with priority (3,775)
Estimated amounts for unsecured creditors without priority:
Net Realizable Amount Avail $56,900
_______ Deficiency _________ 15,725 _______
$226,350 $169,650 $72,625 $(56,700)
Partially Secured
Creditors:
50,000 Accounts Payable $ 28,000 $22,000
Dividend
Question As of June 30, 20X4, the Lillie Corporation has the following assets, liabilities, and owners' equity:
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.
Answer
Lillie Corporation
Statement of Affairs
June 30, 20X4
Estimated Amount
Estimated Net Available for Estimated Gain or
Realizable Unsecured (Loss) on
Book ValueAssets Value Creditors Liquidation
Assets pledged with fully secured creditors:
$190,000 Land and buildings (net) (1) $222,000 $ 2,000 $32,000
Assets pledged with partially secured creditors: (2)
100,000 Inventories 120,000 100,000 20,000
Free assets:
10,000 Cash 10,000 10,000 0
30,000 Marketable securities 24,000 24,000 (6,000)
40,000 Accounts receivable (net) 30,000 30,000 (10,000)
105,000 Machinery (net) 50,000 50,000 (55,000)
40,000 Goodwill 0 0 (40,000)
Estimated amount available for unsecured creditors with and without priority 216,000
Less unsecured creditors with priority (40,000)
Estimated
Estimated Unsecured Amount
Book ValueLiabilities and Owners' Equity Secured Amount With Priority Without Priority
Fully secured creditors:
$ 20,000 Accrued mortgage interest $ 20,000
200,000 Mortgage payable 200,000
Total $220,000
(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.
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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
Book Value Value
Cash $ 1,850 $ 1,850
Accounts Receivable (net) 21,200 17,000
Note Receivable 15,000 15,000
Inventory 41,000 20,000
Investment in Calandir Stock 5,800 15,000
Land and Building (net) 98,500 92,800
Equipment (net) 43,000 8,000
Totals $226,350 $169,650
Liabilities
Book Value
Accounts payable (50,000 secured by inventory
and equipment) $ 90,625
Wages payable (eligible for priority) 3,775
Other Accrued Liabilities 10,000
Accrued interest on notes payable 375
Accrued interest on mortgage payable 600
Notes payable (secured by Investment in Calandir Stock) 10,000
Mortgage payable (secured by land and building) 70,000
Total $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
Answer
Dremer Corporation
Statement of Realization and Liquidation
For the period 6/1/X5 to 6/30/X5
Liabilities
Unsecured
Assets Fully Partial With Without Owners'
Cash Noncash Secured Secured Priority Priority Equity
6/1/X5 Balances:
1,850 224,500 80,975 50,000 3,775 *50,625 40,975
Cash Receipts:
Securities Sale 16,000 (5,800) 10,200
N/R Collected 15,000 (15,000) 0
Equipment Sale 7,000 (43,000) (36,000)
Inventory Sale 22,000 (41,000) (19,000)
Cash Disbursements:
Bank Loan ** (10,375) (10,375)
Part Pmt-A/P (29,000) (50,000) 21,000
6/30/X5 Balance 22,475 119,700 70,600 0 3,775 71,625 (3,825)
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 $ 4,000
Accounts receivable (net) 80,000
Inventories 200,000
Land and building (net) 340,000
Machinery (net) 100,000
Accounts payable 180,000
Salaries payable (eligible for priority) 60,000
Income tax payable 14,000
Trustee's fee payable 20,000
Mortgage payable 240,000
Bank loan payable 90,000
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 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.
14 of 15
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
(continued)
Liabilities
Unsecured
Fully Partially With Without Owner's
Assets Secured Secured Priority Priority Equity
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
Answer
Figure 21-A
Mallory Corporation
Statement of Realization and Liquidation
For the Three Months Ended July 31, 20X5
Assets
(continued)
Liabilities
Unsecured
Fully Partially With Without Owner's
Assets Secured Secured Priority Priority Equity
Beginning balances assigned 5/1/X5 $240,000 $270,000 $94,000 $ 0 $120,000
Cash Receipts:
Collection of accounts receivable (10,000)
Sale of inventory (30,000)
Sale of land and building (240,000) (80,000)
Sale of machinery (30,000)
Cash Disbursements:
Payment of salaries payable (60,000)
Partial payment of accounts pay (180,000) 10,000
Partial payment of bank loan (90,000) 20,000
Ending balances $ $ 0 $ $ 0 $34,000 $30,000 $ $(30,000)
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.
Answer 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:
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.
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Question Fresh-start accounting must be adopted by certain debtors emerging from chapter 11 bankruptcy.
1) When is fresh start accounting required?
2) What are some of the characteristics of fresh-start accounting?
Answer 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 entitys 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 liability claims against the entity, and (b) original voting shareholders retain less
than 50% of the voting shares of the reorganized entity.
Question Differentiate by function the Accounting Statement of Affairs and the Statement of Realization and Liquidation.
Answer The Accounting Statement of Affairs is used primarily to report the estimated amounts available to each class of creditor during a liquidation
or reorganization.
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.
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