Test bank with answers for advanced accounting 3e by jeter chapter 10

To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 10 Insolvency – Liquidation and Reorganization Multiple Choice A corporation that is unable to pay its debts as they become due is: a bankrupt b overdrawn c insolvent d liquidating When a business becomes insolvent, it generally has three possible courses of action Which of the following is not one of the three possible courses of action? a The debtor and its creditors may enter into a contractual agreement, outside of formal bankruptcy proceedings b The debtor continues operating the business in the normal course of the day-to-day operations c The debtor or its creditors may file a bankruptcy petition, after which the debtor is liquidated under Chapter d The debtor or its creditors may file a petition for reorganization under Chapter 11 Assets transferred by the debtor to a creditor to settle a debt are transferred at: a book value of the debt b book value of the transferred assets c fair market value of the debt d fair market value of the transferred assets A composition agreement is an agreement between the debtor and its creditors whereby the creditors agree to: a accept less than the full amount of their claims b delay settlement of the claim until a latter date c force the debtor into a liquidation d accrue interest at a higher rate In a troubled debt restructuring involving a modification of terms, the debtor’s gain on restructuring: a will equal the creditor’s gain on restructuring b will equal the creditor’s loss on restructuring c may not equal the creditor’s gain on restructuring d may not equal the creditor’s loss on restructuring A bankruptcy petition filed by a firm is a: a chapter petition b involuntary petition c voluntary petition d chapter 11 petition When a bankruptcy court enters an “order for relief” it has: a accepted the petition b dismissed the petition c appointed a trustee d started legal action against the debtor by its creditors http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 10-2 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition An involuntary petition filed by a firm’s creditors whereby there are twelve or more creditors must be signed by at least: a two creditors b three creditors c five creditors d six creditors The duties of the trustee include: a appointing creditors’ committees in liquidation cases b approving all payments for debts incurred before the bankruptcy filing c examining claims and disallowing any that are improper d calling a meeting of the debtor’s creditors 10 Which of the following items is not a specified priority for unsecured creditors in a bankruptcy petition? a Administration fees incurred in administering the bankrupt’s estate b Unsecured claims for wages earned within 90 days and are less than $4,650 per employee c Unsecured claims of governmental units for unpaid taxes d Unsecured claims on credit card charges that not exceed $3,000 11 Which statement with respect to gains and losses on troubled debt restructuring is correct? a Creditors losses on restructuring are extraordinary b Debtor’s gains and losses on asset transfers and debtor’s gains on restructuring are combined and treated as extraordinary c Debtor gains and creditor losses on restructuring are extraordinary, if material in amount d Debtor losses on asset transfers and debtor gains on restructuring are reported as a component of net income 12 When fresh-start reporting is used according to Statement of Position (SOP) 90-7, the implication is that a new firm exists Which of the following statements is not correct about fresh-start accounting? a Assets are reported at fair values b Beginning retained earnings is reported at zero c The fair value of the assets must be less than the post liabilities and allowed claims d The original owners must own less than 50% of the voting stock after reorganization 13 A Statement of Affairs is a report designed to show: a an estimated amount that would be received by each class of creditor’s claims in the event of liquidation b a balance sheet prepared on the going-concern assumption c assets and liabilities classified as current and noncurrent d assets and liabilities reported at their current book values 14 When a secured claim is not fully settled by the selling of the underlying collateral, the remaining portion: a of the claim cannot be collected by the creditor b remains as a secured claim c is classified as an unsecured priority claim d is classified as an unsecured nonpriority claim http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 10 Insolvency – Liquidation and Reorganization 10-3 15 Layne Corporation entered into a troubled debt restructuring agreement with their local bank The bank agreed to accept land with a carrying amount of $360,000 and a fair value of $540,000 in exchange for a note with a carrying amount of $765,000 Ignoring income taxes, what amount should Layne report as a gain on its income statement? a $0 b $180,000 c $225,000 d $405,000 16 The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by Nen Co to Baker Co in full settlement of Nen’s liability to Baker: Carrying amount of liability settled Carrying amount of real estate transferred Fair value of real estate transferred $450,000 $300,000 $330,000 What amount should Nen report as ordinary gain (loss) on transfer of real estate? a $(30,000) b $30,000 c $120,000 d $150,000 17 The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by Nen Co to Baker Co in full settlement of Nen’s liability to Baker: Carrying amount of liability settled Carrying amount of real estate transferred Fair value of real estate transferred $450,000 $300,000 $330,000 What amount should Baker report as a gain or (loss) on restructuring? a $120,000 ordinary loss b $120,000 extraordinary loss c $150,000 ordinary loss d $150,000 extraordinary loss 18 Dobler Corporation was forced into bankruptcy and is in the process of liquidating assets and paying claims Unsecured claims will be paid at the rate of thirty cents on the dollar Carson holds a note receivable from Dobler for $75,000 collateralized by an asset with a book value of $50,000 and a liquidation value of $25,000 The amount to be realized by Carson on this note is: a $25,000 b $40,000 c $50,000 d $75,000 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 10-4 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 19 Bad Company filed a voluntary bankruptcy petition, and the statement of affairs reflected the following amounts: Estimated Assets Book Value Current Value Assets pledged with fully secured creditors $ 900,000 $ 1,110,000 Assets pledged partially secured creditors 540,000 360,000 Free assets 1,260,000 960,000 $2,700,000 $2,430,000 Liabilities Liabilities with priority $ 210,000 Fully secured creditors 780,000 Partially secured creditors 600,000 Unsecured creditors 1,620,000 $3,210,000 Assume the assets are converted to cash at their estimated current values What amount of cash will be available to pay unsecured nonpriority claims? a b c d $720,000 $840,000 $960,000 $1,080,000 20 The final settlement with unsecured creditors is computed by dividing: a total net realizable value by total unsecured creditor claims b net free assets by total secured creditor claims c total net realizable value by total secured creditor claims d net free assets by total unsecured creditor claims 21 Dodge Corporation entered into a troubled debt restructuring agreement with their local bank The bank agreed to accept land with a carrying value of $200,000 and a fair value of $300,000 in exchange for a note with a carrying amount of $425,000 Ignoring income taxes, what amount should Dodge report as a gain on its income statement? a $0 b $100,000 c $125,000 d $225,000 22 The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by Drier Co to Cole Co in full settlement of Drier’s liability to Cole: Carrying amount of liability settled Carrying amount of real estate transferred Fair value of real estate transferred $375,000 $250,000 $275,000 What amount should Drier report as ordinary gain (loss) on transfer of real estate? a $(25,000) b $25,000 c $100,000 d $125,000 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 10 Insolvency – Liquidation and Reorganization 23 10-5 The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by Drier Co to Cole Co in full settlement of Drier’s liability to Cole: Carrying amount of liability settled Carrying amount of real estate transferred Fair value of real estate transferred $375,000 $250,000 $275,000 What amount should Cole report as a gain or (loss) on restructuring? a $100,000 ordinary loss b $100,000 extraordinary loss c $125,000 ordinary loss d $125,000 extraordinary loss 24 Poor Company filed a voluntary bankruptcy petition, and the settlement of affairs reflected the following amounts: Assets Assets pledged with fully secured creditors Assets pledged partially secured creditors Free assets Liabilities Liabilities with priority Fully secured creditors Partially secured creditors Unsecured creditors Book Value $ 450,000 270,000 630,000 $1,350,000 Estimated Current Value $ 555,000 180,000 480,000 $1,215,000 $ 105,000 390,000 300,000 810,000 $1,605,000 Assume the assets are converted to cash to their estimated current values What amount of cash will be available to pay unsecured nonpriority claims? a $360,000 b $420,000 c $480,000 d $540,000 25 Dooley Corporation was forced into bankruptcy and is in the process of liquidating assets and paying claims Unsecured claims will be paid at the rate of thirty cents on the dollar Cerner holds a note receivable from Dooley for $90,000 collateralized by an asset with a book value of $60,000 and a liquidation value of $30,000 The amount to be realized by Cerner on this note is: a $30,000 b $48,000 c $60,000 d $90,000 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 10-6 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Problems 10-1 On January 1, 2011, Bargain Mart owed City Bank $1,600,000, under an 8% note with three years remaining to maturity Due to financial difficulties, Bargain Mart was unable to pay the previous year’s interest City Bank agreed to settle Bargain Mart’s debt in exchange for land having a fair market value of $1,310,000 Bargain Mart purchased the land in 2003 for $1,000,000 Required: Prepare the journal entries to record the restructuring of the debt by Bargain Mart 10-2 On January 1, 2010, Gannon, Inc owed BancCorp $12 million on a 10% note due December 31, 2011 Interest was last paid on December 31, 2008 Gannon was experiencing severe financial difficulties and asked BancCorp to modify the terms of the debt agreement After negotiation BancCorp agreed to: - Forgive the interest accrued for the year just ended, - Reduce the remaining two years interest payments to $900,000 each and delay the first payment until December 31, 2011, and - Reduce the unpaid principal amount to $9,600,000 Required: Prepare the journal entries for Gannon, Inc necessitated by the restructuring of the debt at (1) January 1, 2010, (2) December 31, 2011, and (3) December 31, 2012 10-3 On January 2, 2011 Stevens, Inc was indebted to First Bank under a $12 million, 10% unsecured note The note was signed January 2, 2005, and was due December 31, 2014 Annual interest was last paid on December 31, 2009 Stevens negotiated a restructuring of the terms of the debt agreement due to financial difficulties Required: Prepare all journal entries for Stevens, Inc to record the restructuring and any remaining transactions relating to the debt under each independent assumption A First Bank agreed to settle the debt in exchange for land which cost Stevens $8,500,000 and has a fair market value of $10,000,000 B First Bank agreed to (1) forgive the accrued interest from last year (2) reduce the remaining four interest payments to $600,000 each, and (3) reduce the principal to $9,000,000 10-4 On December 31, 2011, Community Bank agreed to restructure a $900,000, 8% loan receivable from Neer Corporation because of Neer’s financial problems At December 31 there was $36,000 of accrued interest for a six-month period Terms of the restructuring agreement are as follows: - Reduce the loan from $900,000 to $600,000; - Extend the maturity date by years from December 31, 2011 to December 31, 2013; - Reduce the interest rate on the loan from 8% to 6% Present value assumptions: Present value of $1 for years at 6% = Present value of $1 for years at 8% = Present value of an ordinary annuity of $1 for years at 6% = Present value of an ordinary annuity of $1 for years at 8% = Required: Compute the gain or loss that will be reported by Community Bank http://downloadslide.blogspot.com 0.8900 0.8573 1.8334 1.7833 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 10 Insolvency – Liquidation and Reorganization 10-5 10-7 Donnelly Corporation incurred major losses in 2010 and entered into voluntary Chapter bankruptcy in the early part of 2011 By June 1, all assets were converted into cash, the secured creditors were paid, and $150,000 in cash was left to pay the remaining claims as follows Accounts payable Claims prior to the trustee’s appointment Property taxes payable Wages payable (all under $4,650 per employee) Unsecured note payable Accrued interest on the note payable Administrative expenses of the trustee Total $ 48,000 21,000 18,000 54,000 60,000 6,000 30,000 $237,000 Required: Classify the claims by their Chapter priority ranking, and analyze which amounts will be paid and which amounts will be written off 10-6 Davis Corporation filed a petition under Chapter of the U.S Bankruptcy Act on June 30, 2011 Data relevant to its financial position as of this date are: Estimated Net Book Value Realizable Values Cash $ 3,000 $ 3,000 Accounts receivable-net 72,000 48,000 Inventories 60,000 72,000 Equipment-net 165,000 87,000 Total assets $300,000 $210,000 Accounts payable Rent payable Wages payable Note payable plus accrued interest Capital stock Retained earnings (deficit) Total liabilities and equity $ 72,000 21,000 45,000 96,000 180,000 (120,000) $300,000 Required: A Prepare a statement of affairs assuming that the note payable and interest are secured by a mortgage on the equipment and that wages are less than $4,650 per employee B Estimate the amount that will be paid to each class of claims if priority liquidation expenses including trustee fees are $24,000 and estimated net realizable values are actually realized http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 10-8 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 10-7 The following data are taken from the statement of affairs of Mitchell Company Assets pledged with fully secured creditors (Realizable value, $635,000) Assets pledged with partially secured creditors (realizable value, $300,000) Free assets (Realizable value, $340,000) Fully secured creditor claims Partially secured creditor claims Unsecured creditor claims with priority General unsecured creditor claims $800,000 365,000 535,000 316,000 400,000 100,000 1,165,000 Required: Compute the amount that will be paid to each class of creditor 10-8 On February 1, 2011, Hilton Company filed a petition for reorganization under the bankruptcy statutes The court approved the plan on September 1, 2011, including the following provisions: Accrued expenses of $21,930, representing priority items, are to be paid in full Hilton Company is to exchange accounts receivable in the face amount of $138,000 and an allowance for uncollectible accounts of $29,200 for the full settlement of $198,600 owed on open account to one of its major unsecured creditors The estimated fair value of the receivables is $104,000 Unsecured creditors of open accounts amounting to $91,600 and paid 40 cents on the dollar in full settlement Hilton Company’s only other major unsecured creditor agreed to a five-year extension of the $500,000 principal owed him on a 10% note payable Accrued interest on the note on September 1, 2011, amounts to $45,000, one-third of which is to be paid in cash and the remainder canceled In addition, no interest is to be charged during the remaining five years to maturity of the note Required: Prepare journal entries on the books of Hilton Company to give effect to the preceding provisions Short Answer The Bankruptcy Reform Act assigns priorities to certain unsecured claims, and each rank must be satisfied in full before the next–lower rank is paid Identify the five categories of unsecured creditor claims Creditors are classified by law as either secured or unsecured Distinguish among fully secured, partially secured, and unsecured creditors http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 10 Insolvency – Liquidation and Reorganization 10-9 Short Answer Questions from the Textbook List the primary types of contractual agreements between a debtor company and its creditors and briefly explain what is involved in each of them Distinguish between a voluntary and involuntary bankruptcy petition Distinguish among fully secured, partially se-cured, and unsecured claims of creditors Five priority categories of unsecured claims must be paid before general unsecured creditors are paid Briefly describe what makes up each category What are “dividends” in a bankruptcy proceeding? For each of the following debt restructurings, indicate whether a gain is recognized and, if so, how the gain is measured and reported (a)Transfer of assets by the debtor to the creditor.(b)Grant of an equity interest by the debtor to the creditor.(c)Modification of the terms of the payable What is the purpose of a Statement of Affairs? One of the officers of a corporation that had just received a discharge in bankruptcy said, “Good, now we don’t owe anyone.” Is he correct? What are the duties of a trustee in a liquidation proceeding? 10 What is the purpose of a combining work paper prepared by a trustee? 11 What is the purpose of a realization and liquidation account? Business Ethics Question from Textbook From an ethical perspective, some believe that it is never justifiable for an individual or business to declare bankruptcy Others believe that some actions are appropriate only in extreme circumstances Without question, as stated in the Journal of Accountancy, November 2005,page 51, “the ease with which debtors have been able to walk away from debt has frustrated creditors for years.” Describe the differences between Chapter (liquidations) and Chapter 11 (reorganizations)from an ethical standpoint Who is most likely to be hurt by a Chapter bankruptcy? Discuss the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 Do you believe the changes wrought by this act will serve to protect creditors? The Protection Act of 2005 requires individuals, but not businesses, to undergo a “means” test before they can seek Chapter relief Do you believe this change should be applied to businesses as well? Why or why not? Do you think that you would ever resort to filing for bankruptcy relief yourself? Why or why not? http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 10-10 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition ANSWER KEY c b d a d c a 10 11 12 13 14 b c d d c a d 15 16 17 18 19 20 21 c b a b d d c 22 23 24 25 Problems 10-1 Land b a d b 310,000 Gain on Disposal of Land 310,000 Note Payable Interest Payable Land Gain on Debt Restructuring 10-2 Carrying amount: $12,000,000 + $1,2000,000 = Future payments: ($900,000 × 2) + 9,600,000 = Gain to debtor/Loss to creditor 1,600,000 128,000 1,310,000 418,000 $13,200,000 11,400,000 $ 1,800,000 January 1, 2010 Interest Payable Note Payable Gain on Debt Restructuring 1,200,000 600,000 1,800,000 December 31, 2011 Note Payable Cash 900,000 900,000 December 31, 2012 Note Payable Cash (Interest) Note Payable Cash (Principal) 900,000 900,000 9,600,000 9,600,000 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 10 Insolvency – Liquidation and Reorganization 10-3 A B January 2, 2011 Land Gain on Disposal of Land 1,500,000 1,500,000 Interest Payable Note Payable Land Gain on Debt Restructuring 1,200,000 12,000,000 Carrying amount $12,000,000 + $1,200,000 = Future payments ($600,000 × 4) + $9,000,000 = Gain to debtor/Loss to creditor $13,200,000 11,400,000 $ 1,800,000 January 2, 2011 Interest Payable Note Payable Gain on Debt Restructuring 1,200,000 600,000 December 31, 2011, 2012, 2013, 2014 Note Payable (Interest) Cash 600,000 10,000,000 3,200,000 1,800,000 600,000 December 31, 2014 Note Payable Cash 10-4 A 10-11 9,000,000 9,000,000 Community Bank’s loss on restructuring: Carrying value of the loan before restructuring Present value of $600,000 due in years at 8% historical rate: ($600,000 × 0.8573) = Present value of $36,000 interest for years at 8% historical rate: ($36,000 × 1.7833) = Carrying value of the loan Loss on restructuring $936,000 $514,380 64,199 $578,579 (578,579) $357,421 10-5 Unsecured priority claims: Claim Amount Administrative expenses Claims prior to the trustee’s appointment Wages payable Property taxes payable To be Paid $30,000 21,000 54,000 18,000 http://downloadslide.blogspot.com $30,000 21,000 54,000 18,000 Cash Left $150,000 120,000 99,000 45,000 27,000 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 10-12 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 10-5 (Continued) Unsecured Nonpriority Claims: Claim Amount Accounts payable Unsecured note Accrued interest on the note To be Paid $ 48,000 60,000 6,000 Written Off $12,000* 15,000** $36,000 45,000 6,000 $27,000 / ($48,000 + $60,000) = 25 * $48,000 × 0.25 = $12,000 **$60,000 × 0.25 = $15,000 10-6 A Davis Corporation Statement of Affairs June 30, 2011 Deficiency Account Realizable Value (Loss/Gain) Book Value Assets Pledged with partially secured creditors $165,000 Equipment-net (78,000) Less: Note payable and accrued interest (96,000) Unsecured amount (See below) (9,000) Free Assets 3,000 Cash 72,000 Accounts receivable-net (24,000) 60,000 Inventories 12,000 Total net realizable value 123,000 Less: Priority liabilities – wages payable 45,000 Total available for unsecured creditors 78,000 Estimated deficiency to unsecured creditors 30,000 $300,000 (90,000) http://downloadslide.blogspot.com $87,000 $ 3,000 48,000 72,000 $108,000 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 10 Insolvency – Liquidation and Reorganization 10-6 10-13 (Continued) Book Value Unsecured Liabilities Equities Priority liabilities $ 45,000 Wages payable (assumed under $4,650 per employee) $ 45,000 Partially secured creditors 96,000 Note payable and accrued interest Less: Equipment pledged as security (87,000) Unsecured creditors 72,000 27,000 Stockholders’ equity 180,000 180,000 (120,000) (120,000) $300,000 $ 60,000 Estimated Deficiency B $ 96,000 $ 9,000 Accounts payable Rent payable 72,000 27,000 Capital stock Retained earnings (deficit) $108,000 $(30,000) Estimated payments per dollar for unsecured creditors Cash available $210,000 Distribution to partially secured and unsecured priority creditors: Note payable and interest Administrative expenses Wages payable Available to unsecured nonpriority creditors Note payable and interest (unsecured portion) Accounts payable Rent payable Unsecured nonpriority claims ($54,000 / $108,000 = $0.50 per dollar) http://downloadslide.blogspot.com $87,000 24,000 45,000 156,000 $ 54,000 $ 9,000 72,000 27,000 $108,000 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 10-14 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 10-6 (Continued) Expected recovery for each class of claims Partially secured Note payable and interest Secured portion Unsecured portion ($9,000 × 0.50) $87,000 4,500 $91,500 Unsecured priority Administrative expenses Wages payable $24,000 45,000 69,000 Unsecured nonpriority Accounts payable ($72,000 × 0.50 Rent payable ($27,000 × 0.50) Total payments $36,000 13,500 49,500 $210,000 10-7 Realizable value of all assets ($635,000 + $300,000 + $340,000) Allocated to: Fully secured creditors Partially secured creditors Unsecured creditors with priority Remainder available to general unsecured creditors Payment rate to general unsecured creditors (Including balance due to partially secured creditors) $559,000 / ($1,165,000 + ($400,000 - $300,000)) $1,275,000 (316,000) (300,000) (100,000) $559,000 44.2% Realizable value of assets: Assets pledged to fully secured creditors Assets pledged to partially secured creditors Free assets Total realizable value $635,000 300,000 340,000 $1,275,000 Amounts to be paid to: Fully secured creditors Partially secured creditors [$300,000 + (0.442 × $100,000)] Unsecured creditors with priority General unsecured creditors (0.442 × $1,165,000) Total $316,000 344,200 100,000 514,800* $1,275,000 *Rounded $130 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 10 Insolvency – Liquidation and Reorganization 10-15 10-8 Accrued Expenses Cash 21,930 Allowance for Uncollectible Accounts Loss on Transfer of Assets Accounts Receivable ($138,000 - $104,000) 29,200 4,800 21,930 Accounts Payable Accounts Receivable Gain on Restructuring of Debt ($198,600 - $104,000) Accounts Payable Cash ($91,600 × 0.40) Gain on Restructuring of Debt Notes Payable Accrued Interest Payable Cash Restructured Debt Gain on Restructuring of Debt ($545,000 - $515,000) 34,000 198,600 104,000 94,600 91,600 36,640 54,960 500,000 45,000 15,000 500,000 30,000 Short Answer The five categories of unsecured creditor claims are: a Administration expenses and fees incurred in administering the bankrupt’s estate b Unsecured claims for wages and salaries earned within 90 days before the date of filing of the petition c Unsecured claims for contributions to employee benefit plans from services provided within 180 days before the date of filing of the petition d Unsecured claims of individuals arising from deposits for the purchase, lease, or rental of property or services that were not delivered e Unsecured claims of governmental units for unpaid taxes Fully secured creditor claims are those with liens against assets whose realizable value is equal to or in excess of the claim Partially secured claims are those with liens against assets whose realizable value is less than the amount of the claim Unsecured creditors are paid from whatever proceeds remain from the realization process Short Answer Questions from the Textbook Solutions Extension of payment periods The debtor continues to manage the business, and the creditors merely extend the payment due date(s) for existing debts Composition agreements A composition agreement is an agreement between the debtor company and its creditors under which the creditors agree to accept less than the full amount of their claims http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 10-16 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Formation of a creditor’s committee The debtor company and its creditors agree to form a committee of creditors responsible for managing the debtor’s business affairs for the period during which plans are developed to rehabilitate, reorganize, or liquidate the business Voluntary assignment of assets An insolvent debtor elects to voluntarily place his property under the control of a trustee for the benefit of his creditors In a voluntary petition, the debtor files a petition with a bankruptcy court for liquidation under Chapter or for reorganization under Chapter 11 The bankruptcy judge may refuse a voluntary petition if refusal is considered to be in the best interest of the creditors In an involuntary petition, creditors initiate the action by filing a petition for liquidation or reorganization with the bankruptcy court If there are twelve or more creditors, the petition must be signed by three or more of such creditors whose claims aggregate at least $5,000 more than the value of any liens on the property of the debtor If there are fewer than twelve creditors, the petition may be filed by one or more of such creditors whose claims aggregate at least $5,000 more than the value of any liens on the debtor’s property Fully secured claims Those claims with liens against specific assets whose realizable value is equal to or in excess of the claim Partially secured claims Those claims with liens against specific assets whose realizable value is less than the amount of the claim Unsecured claims Those claims that are not secured by liens against specific assets and are, therefore, paid from whatever total money remains after secured creditors are satisfied Some unsecured claims take priority over others under federal bankruptcy law http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 10 Insolvency – Liquidation and Reorganization 10-17 The five categories of unsecured claims with priority are: a Administrative expenses, fees, and charges incurred in administering the bankrupt’s estate b Unsecured claims for wages, salaries, or commissions earned by an employee within 90 days before the date of filing a petition in bankruptcy, limited to the extent of $4,650 per employee c Claims for contributions to employee benefit plans from services rendered within 180 days before the date of filing a petition in bankruptcy, but subject to certain limitations d Unsecured claims of individuals, to the extent of $2,100 for each such individual, arising from the deposit of money in connection with the purchase, lease, or rental of property or services that were not delivered or performed e Claims of governmental units for unpaid taxes Dividends represent the final distribution made to general unsecured creditors a Transfer of Assets: The transfer of assets by a debtor to a creditor generally produces two types of gain or loss A gain on restructuring of debt is recognized for the excess of the carrying value of the payable over the fair value of the assets transferred This gain is reported as a component of operating income In addition, a gain or loss on transfer of assets is recognized for the difference between the fair value and book value of the assets transferred This gain (loss) is reported as a component of operating income also b Grant of an Equity Interest: A debtor who grants an equity interest to a creditor will report a gain for the difference between the fair value of the equity interest issued and the carrying amount of the payable settled c Modification of Terms: In a modification of terms, the debtor will report a gain on restructuring only if the total future cash payments specified by the new terms are less than the carrying value of the payable The amount of gain is measure as the difference between the total future cash payments specified by the new terms and the carrying value of the payable The statement of affairs is an accounting report that is designed to permit interested parties to determine the total expected amounts that could be realized from the disposition of a company’s assets, the priorities in the use of the realization proceeds in satisfying claims, and the potential net deficiency that would result if the assets were realized and claims liquidated The officer is incorrect Some claims, such as for taxes, fines, and penalties are not discharged http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 10-18 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition The primary duties of a trustee are: a To be accountable of all property received b To examine proofs of claims and object to the allowance of any claim that is improper c To furnish such information concerning the estate and the estate’s administration as is requested by a party in interest d If the business of the debtor is authorized to be operated, file with the court and with any governmental unit charged with responsibility for collection of any tax arising out of such operation, periodic reports and summaries of the operation of the business e If the debtor has not done so, file with the court a list of creditors, a schedule of assets and liabilities, and a statement of the debtor’s financial affairs f If applicable, file a plan of reorganization, and, if the plan is accepted, file such reports as are required by the court 10 The purpose of a combining workpaper is to serve as a means by which the trustee’s accounts are united with the debtor company’s accounts in order to prepare appropriate financial statements 11 The purpose of a realization and liquidation account is to report summary realization and distribution activities of a trustee or receiver to the court It reports the changes that have occurred during a period in the monetary items because that is what the court officials are primarily interested in Business Ethics Question from the Textbook Solution In chapter bankruptcy liquidation, firms are assumed to be past the stage of reorganization and must sell off any un-exempt assets to pay creditors In contrast, Chapter 11 bankruptcy allows the firm the opportunity to reorganize its debt and to try to re-emerge as a healthy organization In both cases, the creditors and other claim-holders suffer losses as they will be most likely getting less return on investment than expected at the time of the initial decision to invest in the company From an ethical perspective, a chapter 11 bankruptcy provides the creditors and other claim-holders a better chance of recovering higher value for their investments than under chapter as the firm strives to recover and reorganize under chapter 11 but not under chapter The new law makes sweeping changes to American bankruptcy laws and makes it more difficult for individuals to file bankruptcy under chapter The new law requires a means test to determine whether the borrowers have enough resources to pay for their debts For additional information, see the following link: http://en.wikipedia.org/wiki/Bankruptcy_Abuse_Prevention_and_Consumer_Protection_ Act] In addition the new law laid down the following requirements Mandatory credit counseling and debtor education Additional filing requirements and fees http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter 10 Insolvency – Liquidation and Reorganization 10-19 Increased attorney liability and costs Fewer automatic protections for filers Increased compliance requirements for small businesses Increased amount of debt repayment under Chapter 13 Increased length of time between discharges These changes provide more safety for the creditors, who should consequently be better protected Individuals who fail the means test may opt instead for Chapter 13, which involves a repayment of their debt over time Applying this test to businesses would benefit the creditors and other claim-holders, as they would feel a slight buffer to their risk, which might stimulate new business as a result of easier fund raising It may also prevent businesses from venturing into unduly risky areas as they would not be able to bail out as easily by filing under chapter if things went wrong (hence becoming somewhat more risk averse) It would seem to shift the risk balance somewhat to the shoulders of the entrepreneur from those of the investor Filing for bankruptcy is never a desirable or ethical option, but sometimes circumstances may arise that seem to force a business or an individual into this tough situation Whether the individual finds another way at such a time or not is a personal issue and an ethical dilemma, and there is not necessarily a correct answer to this question The purpose of this discussion is to get the student to thinking about his or her personal position, and where his ethical stance would be before the situation arises Ideally, of course, the student will never find himself or herself in such a position, but, as the old saying goes, until you’ve walked a mile in another’s shoes… http://downloadslide.blogspot.com ... andtest testbank, bank, visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 10- 6 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Problems 10- 1... solutionsand andtest testbank, bank, visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 10- 8 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 10- 7 The... ebook,solutions solutionsand andtest testbank, bank, visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 10- 10 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition