Test bank advanced financial accounting ch 20 corporations in financial difficulty

Insolvency D.Credit squeeze AACSB: Reflective Thinking AICPA: Decision Making 2.. I, II, and III AACSB: Reflective Thinking AICPA: Decision Making 4.. Creditors' committee management C.T

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Corporations in Financial DifficultyMultiple Choice Questions

1 What is defined as a condition in which a company is unable to meet debts as the debtsmature?

A Deficit

B Liability

C Insolvency

D Credit squeeze

2 Under a composition agreement,

A creditors agree to accept less than the face amount of their claims

B debtors in financial difficulty transfer assets "without recourse."

C a creditors' committee is initiated with a plan of settlement proposed by the debtor

D the debtor petitions for relief in a bankruptcy court

3 In which of the following ways can debt be restructured?

I Assets can be transferred to the creditor

II An equity interest can be granted to the creditor

III The terms of the debt can be modified

A I and II only

B I and III only

C II and III only

D I, II, and III

4 Under which nonjudicial action do creditors agree to assist the debtor in managing the mostefficient payment of creditors' claims?

A Debt restructuring arrangement

B Creditors' committee management

C Transfer of assets

D Composition agreement

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5 A transfer of assets by a company in financial difficulty is considered a sale if:

I the transfer includes a recourse provision allowing the buyer to return the asset

II the transferee obtains the right to pledge or exchange the transferred assets.III the transferred assets have been isolated from the transferor

IV the transferor does not maintain effective control over the transferred assets

A I, II, and IV

B Both I and III

C Both I and II

D II, III, and IV

6 Chapter 11 of the Bankruptcy Code provides for:

B Only II and III

C Only I and III

D I, II, and III

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9 A debtor may file which type of petition when seeking judicial protection under theBankruptcy Reform Act?

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13 Which of the following could be true of the proceedings under Chapter 11 of the

Bankruptcy Code?

A Always administered by the bankruptcy courts

B The debtor's assets are sold and its liabilities extinguished

C The company does not operate during this period

D The debtor continues as a business after the reorganization

14 Under Chapter 11 proceedings, what represents the fair value of the entity before

considering liabilities and approximates the amount a willing buyer would pay for the entity'sassets?

A Reorganization value

B Fire sale value

C Fresh start value

D Excess value

15 A reorganization value in excess of amounts assignable to identifiable assets is:

A not reported

B reported as an intangible asset called Reorganization Value in Excess of Amounts

Allocable to Identifiable Assets

C reported as Goodwill Associated with Exit or Disposal Activities

D passed on to prior shareholders of the company

16 Which of the following observations regarding the use of fresh start accounting is true?

A It is always required under Chapter 11 bankruptcy proceedings

B Prior shareholders will have control of the emerging company

C It results in a new reporting entity

D It is used under Chapter 7 bankruptcy proceedings

17 _ have liens, or security interests, on specific assets

A Secured creditors

B Creditors with priority

C Unsecured creditors

D Assured creditors

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18 As defined by the Bankruptcy Code, creditors with priority:

I have collateral claim against specific assets

II are unsecured creditors who have priority over other unsecured creditors

III are the first to be paid from any proceeds available to unsecured creditors

A I only

B II only

C I, II and II

D Both II and III

19 Which of the following observations concerning claims by general unsecured creditors isNOT true?

A They are paid only after secured creditors and unsecured creditors with priority aresatisfied to the extent of any legal limits

B They often receive less than the full amount of their claim

C They are entitled to "preference payments" at the discretion of the debtor's management

D The amounts to be paid to them are usually stated as a percentage of the total claim

20 The payment to general unsecured creditors is often termed:

A is reduced from the monies available to the general unsecured creditors

B is usually written off

C may be recovered and returned to the cash available for all creditors

D are not recovered, as management assurances are binding

22 The accounting statement of affairs is prepared:

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B Statement of realization and liquidation

C Statement of financial position

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27 All of the following items are reported in a statement of realization and liquidationexcept:

A Cash

B Prepaid assets

C Depreciable assets (net)

D Receiver's expenses

28 Which of the following items are likely to be reported in the supplementary items section

of a statement of realization and liquidation?

A Creditors' claims settled during the period

B Trustee's administration fees

C New obligations incurred by the trustee

D Assets subsequently acquired by the trustee

Orville Company recently petitioned for bankruptcy and is now in the process of preparing astatement of affairs The carrying values and estimated fair values of the assets of OrvilleCompany are as follows:

Debts of Orville are as follows:

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32 Eagle Company recently petitioned for bankruptcy and is now in the process of preparing

a statement of affairs The following information has been assembled for this statement:

What amount will be paid to the fully secured creditors and the creditors with priority?

A Option A

B Option B

C Option C

D Option D

33 A "debtor-in-possession" balance sheet is prepared for a company which:

A is having its debts restructured

B is undergoing a liquidation under Chapter 7

C is undergoing a reorganization under Chapter 11

D is in bankruptcy reorganization but management still controls the company

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34 A debtor-in-possession balance sheet should report:

I Liabilities not subject to compromise

II Liabilities subject to compromise

C Income tax benefit

D Loss on disposal of assets

Essay Questions

36 What are the conditions necessary for using fresh start reporting in reorganization?

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37 Wilbur Corporation is to be liquidated under Chapter 7 of the Bankruptcy Code Thebalance sheet on December 31, 2008, is as follows:

The following additional information is available:

1 Marketable securities consist of 2,000 shares of Bristol Inc common stock The marketvalue per share of the stock is $8 The stock was pledged against a $20,000, 8 percent notepayable that has accrued interest of $800

2 Accounts receivable of $40,000 are collateral for a $35,000, 10 percent note payable thathas accrued interest of $3,500

3 Inventory with a book value of $35,000 and a current value of $32,000 is pledged againstaccounts payable of $60,000 The appraised value of the remainder of the inventory is

$50,000

4 Only $1,000 will be recovered from prepaid insurance

5 Land is appraised at $65,000 and plant and equipment at $160,000

6 It is estimated that the franchises can be sold for $15,000

7 All the wages payable qualify for priority

8 The mortgages are on the land and on a building with a book value of $110,000 and anappraised value of $100,000 The accrued interest on the mortgages is $7,500

9 Estimated legal and accounting fees for the liquidation are $10,000

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38 A trustee has been appointed for Smith Company, which is being liquidated under Chapter

7 of the Bankruptcy Code The following transactions occurred after the assets were

transferred to the trustee:

1 Credit sales by the trustee were $100,000 Cost of goods sold were $72,000, consisting ofall the inventory transferred from Smith

2 The trustee sold all $20,000 worth of marketable securities for $15,000

3 Receivables collected by the trustee:

Old: $28,000 of the $50,000 transferred

New: $65,000

4 Disbursements by the trustee:

Old current payables: $31,000 of the $65,000 transferred

Trustee's expenses: $6,000

5 Recorded $24,000 depreciation on the plant assets of $120,000 transferred from Smith

Required:

Prepare a statement of realization and liquidation according to the traditional approach

illustrated in the chapter

39 Briefly explain the three classes of creditors specified in the Bankruptcy Code

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40 To obtain cash quickly, DebCo sold $750,000 of its receivables to Finco., with recourse.

As the accountant for DebCo., what issues do you need to resolve in order to determine theappropriate accounting treatment?

Chapter 20 Corporations in Financial Difficulty Answer Key

Multiple Choice Questions

1 What is defined as a condition in which a company is unable to meet debts as the debtsmature?

A.Deficit

B.Liability

C Insolvency

D.Credit squeeze

AACSB: Reflective Thinking

AICPA: Decision Making

2 Under a composition agreement,

A creditors agree to accept less than the face amount of their claims.

B.debtors in financial difficulty transfer assets "without recourse."

C.a creditors' committee is initiated with a plan of settlement proposed by the debtor

D.the debtor petitions for relief in a bankruptcy court

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3 In which of the following ways can debt be restructured?

I Assets can be transferred to the creditor

II An equity interest can be granted to the creditor

III The terms of the debt can be modified

A.I and II only

B.I and III only

C.II and III only

D I, II, and III

4 Under which nonjudicial action do creditors agree to assist the debtor in managing the mostefficient payment of creditors' claims?

A.Debt restructuring arrangement

B Creditors' committee management

C.Transfer of assets

D.Composition agreement

5 A transfer of assets by a company in financial difficulty is considered a sale if:

I the transfer includes a recourse provision allowing the buyer to return the asset

II the transferee obtains the right to pledge or exchange the transferred assets

III the transferred assets have been isolated from the transferor

IV the transferor does not maintain effective control over the transferred assets

A.I, II, and IV

B.Both I and III

C.Both I and II

D II, III, and IV

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8 The Bankruptcy Reform Act contains chapters which deal with:

I Individuals

II Corporations

III Municipal governments

A.Only I and II

B.Only II and III

C.Only I and III

D I, II, and III

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10 Creditors may file which type of petition when seeking remedy under the BankruptcyCode?

11 Under the Bankruptcy Code, an insolvent corporation may be:

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12 Which chapters of the Bankruptcy Code deal with corporations?

A.Chapters 1, 3, and 5

B.Chapter 9

C Chapters 7 and 11

D.Chapters 12 and 13

13 Which of the following could be true of the proceedings under Chapter 11 of the

Bankruptcy Code?

A.Always administered by the bankruptcy courts

B.The debtor's assets are sold and its liabilities extinguished

C.The company does not operate during this period

D The debtor continues as a business after the reorganization.

14 Under Chapter 11 proceedings, what represents the fair value of the entity before

considering liabilities and approximates the amount a willing buyer would pay for the entity'sassets?

A Reorganization value

B.Fire sale value

C.Fresh start value

D.Excess value

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15 A reorganization value in excess of amounts assignable to identifiable assets is:

A.not reported

B reported as an intangible asset called Reorganization Value in Excess of Amounts

Allocable to Identifiable Assets

C.reported as Goodwill Associated with Exit or Disposal Activities

D.passed on to prior shareholders of the company

AICPA: Reporting

16 Which of the following observations regarding the use of fresh start accounting is true?

A.It is always required under Chapter 11 bankruptcy proceedings

B.Prior shareholders will have control of the emerging company

C It results in a new reporting entity.

D.It is used under Chapter 7 bankruptcy proceedings

17 _ have liens, or security interests, on specific assets

A Secured creditors

B.Creditors with priority

C.Unsecured creditors

D.Assured creditors

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18 As defined by the Bankruptcy Code, creditors with priority:

I have collateral claim against specific assets

II are unsecured creditors who have priority over other unsecured creditors

III are the first to be paid from any proceeds available to unsecured creditors

A.I only

B.II only

C.I, II and II

D Both II and III

19 Which of the following observations concerning claims by general unsecured creditors isNOT true?

A.They are paid only after secured creditors and unsecured creditors with priority aresatisfied to the extent of any legal limits

B.They often receive less than the full amount of their claim

C They are entitled to "preference payments" at the discretion of the debtor's management.

D.The amounts to be paid to them are usually stated as a percentage of the total claim

20 The payment to general unsecured creditors is often termed:

A.a "preference payment."

B a "dividend."

C.a "write-off."

D.a "bonus."

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21 "Preference payments" made by the debtor to one creditor to the detriment of all othercreditors within 90 days before the bankruptcy petition was filed:

A.is reduced from the monies available to the general unsecured creditors

B.is usually written off

C may be recovered and returned to the cash available for all creditors.

D.are not recovered, as management assurances are binding

22 The accounting statement of affairs is prepared:

A.at the end of the reorganization process

B.at the end of the liquidation process

C.at the beginning of the reorganization process

D at the beginning of the liquidation process.

23 What is the general form of the trustee's opening entry, accepting the assets of the debtorcompany?

A Option A

B.Option B

C.Option C

D.Option D

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24 Which monthly report shows the results of the trustee's fiduciary actions beginning at thepoint the trustee accepts the debtor's assets?

A.Statement of affairs

B Statement of realization and liquidation

C.Statement of financial position

D.Statement of activities

25 The Statement of Realization and Liquidation contains sections for all the following itemsexcept:

A.assets

B.supplementary items

C.liabilities

D stockholders equity.

26 In a statement of realization and liquidation, unusual revenue items are reported under:

A.assets

B.extraordinary items

C supplementary items.

D.These are never reported

27 All of the following items are reported in a statement of realization and liquidation

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