1. Trang chủ
  2. » Tài Chính - Ngân Hàng

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

19 478 0

Đang tải... (xem toàn văn)

Tài liệu hạn chế xem trước, để xem đầy đủ mời bạn chọn Tải xuống

THÔNG TIN TÀI LIỆU

Thông tin cơ bản

Định dạng
Số trang 19
Dung lượng 198,28 KB

Nội dung

in full settlement of Nen’s liability to Baker: Carrying amount of liability settled $450,000 Carrying amount of real estate transferred $300,000 Fair value of real estate transferred $3

Trang 1

Chapter 10 Insolvency – Liquidation and Reorganization

Multiple Choice

1 A corporation that is unable to pay its debts as they become due is:

a bankrupt

b overdrawn

c insolvent

d liquidating

2 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 7

d The debtor or its creditors may file a petition for reorganization under Chapter 11

3 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

4 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

5 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

6 A bankruptcy petition filed by a firm is a:

a chapter petition

b involuntary petition

c voluntary petition

d chapter 11 petition

Trang 2

8 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

9 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 do 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

Trang 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 $450,000 Carrying amount of real estate transferred $300,000 Fair value of real estate transferred $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 $450,000 Carrying amount of real estate transferred $300,000 Fair value of real estate transferred $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

Trang 4

19 Bad Company filed a voluntary bankruptcy petition, and the statement of affairs reflected the

following amounts:

Estimated

Assets pledged with fully secured creditors $ 900,000 $ 1,110,000 Assets pledged partially secured creditors 540,000 360,000

Liabilities

$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 $720,000

b $840,000

c $960,000

d $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 $375,000

Carrying amount of real estate transferred $250,000

Fair value of real estate transferred $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

Trang 5

23 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 $375,000

Carrying amount of real estate transferred $250,000

Fair value of real estate transferred $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:

Estimated

Assets pledged with fully secured creditors $ 450,000 $ 555,000

Assets pledged partially secured creditors 270,000 180,000

Liabilities

$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

Trang 6

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 2 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 2 years at 6% = 0.8900

Present value of $1 for 2 years at 8% = 0.8573

Present value of an ordinary annuity of $1 for 2 years at 6% = 1.8334

Present value of an ordinary annuity of $1 for 2 years at 8% = 1.7833

Required:

Compute the gain or loss that will be reported by Community Bank

Trang 7

10-5 Donnelly Corporation incurred major losses in 2010 and entered into voluntary Chapter 7

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

Claims prior to the trustee’s appointment 21,000

Wages payable (all under $4,650 per employee) 54,000

Administrative expenses of the trustee 30,000

Required:

Classify the claims by their Chapter 7 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 7 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

Note payable plus accrued interest 96,000

Total liabilities and equity $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

Trang 8

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) $800,000 Assets pledged with partially secured creditors

Free assets (Realizable value, $340,000) 535,000

Partially secured creditor claims 400,000 Unsecured creditor claims with priority 100,000 General unsecured creditor claims 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:

1 Accrued expenses of $21,930, representing priority items, are to be paid in full

2 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

3 Unsecured creditors of open accounts amounting to $91,600 and paid 40 cents on the dollar

in full settlement

4 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

1 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

2 Creditors are classified by law as either secured or unsecured Distinguish among fully secured,

partially secured, and unsecured creditors

Trang 9

Short Answer Questions from the Textbook

1 List the primary types of contractual agreements between a debtor company and its creditors and

briefly explain what is involved in each of them

2 Distinguish between a voluntary and involuntary bankruptcy petition

3 Distinguish among fully secured, partially se-cured, and unsecured claims of creditors

4 Five priority categories of unsecured claims must be paid before general unsecured creditors are

paid Briefly describe what makes up each category

5 What are “dividends” in a bankruptcy proceeding?

6 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

7 What is the purpose of a Statement of Affairs?

8 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?

9 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.”

1 Describe the differences between Chapter 7 (liquidations) and Chapter 11 (reorganizations)from an

ethical standpoint Who is most likely to be hurt by a Chapter 7 bankruptcy?

2 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?

3 The Protection Act of 2005 requires individuals, but not businesses, to undergo a “means” test

before they can seek Chapter 7 relief Do you believe this change should be applied to businesses as well? Why or why not?

4 Do you think that you would ever resort to filing for bankruptcy relief yourself? Why or why not?

Trang 10

ANSWER KEY

Problems

10-2 Carrying amount: $12,000,000 + $1,2000,000 = $13,200,000

Future payments: ($900,000 × 2) + 9,600,000 = 11,400,000

Gain to debtor/Loss to creditor $ 1,800,000 January 1, 2010

December 31, 2011

December 31, 2012

Ngày đăng: 11/04/2017, 14:56

TỪ KHÓA LIÊN QUAN

w