To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 17 Test Bank CORPORATE LIQUIDATIONS, REORGANIZATIONS, AND DEBT RESTRUCTURINGS FOR FINANCIALLY DISTRESSED CORPORATIONS Multiple Choice Questions LO1 When the bankruptcy court grants an order for relief a creditors may not seek payment for their claims directly from the debtor corporation b the reorganization plan was accepted by creditors having at least one-half of the total number of claims and the claims represent at least two-thirds of the total amount owed c the bankruptcy court confirms that the reorganization plan is fair and equitable to creditors d the court discharges the debtor except for those claims provided for in the reorganization plan LO1 Which of the following must approve a Chapter 11 plan? a b c d LO1 organization’s management assigned trustee entity’s stockholders court and the creditors When the accounting equation of a corporation computes a negative ownership position, because liabilities are greater than assets, the firm is a b c d LO1 The The The The a distressed corporation a bankrupt corporation insolvent in the equity sense insolvent in the bankruptcy sense A bankruptcy petition filed by a firm’s creditors is a b c d a Chapter petition a petition for liquidation an involuntary petition a voluntary petition ©2009 Pearson Education, Inc publishing as Prentice Hall 17-1 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO1 The duties of a debtor in possession in a Chapter 11 bankruptcy case not include a filing a list of creditors and schedules of assets and liabilities with the bankruptcy court b operating the business during the reorganization period c filing a reorganization plan d surrendering all property to the trustee LO1 Liabilities incurred after entering Chapter 11 a can only occur after secured creditors are paid b must be approved by creditors’ committees in liquidation cases c must be approved by trustees d must be preapproved by the bankruptcy court LO1 In a troubled debt restructuring involving a modification of terms, the debtor’s gain on restructuring a b c d LO1 will equal will equal may or may may or may the the not not creditor’s gain on restructuring creditor’s loss on restructuring equal the creditor’s gain on restructuring equal the creditor’s loss on restructuring A single creditor a can never file a petition for bankruptcy b with a $10,000 or more secured claim may file a petition for bankruptcy c with a $10,000 or more unsecured claim may file a petition for bankruptcy, if there are fewer than 12 unsecured creditors d with a $10,000 or more unsecured claim may file a petition for bankruptcy if there are more than 12 unsecured creditors LO1 A case against a corporate debtor a can be filed only under Chapter b can be filed only under Chapter 11 c * can be filed either under Chapter or Chapter 11 d will be determined by the trustee whether is shall be Chapter or Chapter 11 ©2009 Pearson Education, Inc publishing as Prentice Hall 17-2 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO1 10 A primary difference between bankruptcy petitions is that voluntary and involuntary a creditors file the petition in an involuntary filing b trustees are not used in an voluntary filing c voluntary petitions are not subject to review by the bankruptcy court d the debtor corporation files the petition in an involuntary filing LO1 11 Creditor committees are elected a in all bankruptcy cases b in Chapter cases c only in bankruptcy cases petitions d in Chapter 11 cases LO2 12 arising from involuntary The first-to-last ranking order of priority of the following: I.stockholder claims II.unsecured priority claims III.secured claims II.unsecured nonpriority claims in a Chapter bankruptcy case is a b c d LO2 13 I,II,IV, and III III,II,IV and I III,I,IV, and II II,IV,III,and I In typical trustee accounting a gains and losses on the sale of assets are charged to the estate equity account b unrecorded liabilities discovered by the trustee are credited to the estate equity account and credited to the liability account c liquidation expenses are charged to the estate equity account d all of the above procedures are typical for trustee accounting ©2009 Pearson Education, Inc publishing as Prentice Hall 17-3 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO2 14 Trustees in a bankruptcy cases have the duty to a b c d LO3 15 If a debtor has material gains on its debt restructurings, these gains will be reported as a b c d LO3 16 lower of cost or market value of the note receivable book value of the transferred assets fair market value of the note receivable fair market value of the transferred assets A judge would permit a debtor-in-possession in a a b c d LO4 18 operating gains of the debtor other non-operating gains of the debtor extraordinary gains of the debtor discontinued operations A creditor will record assets transferred in full settlement of a note receivable at the a b c d LO3 17 nullify affiliate transactions relegate tax payments to an unsecured status call creditor meetings on liquidation proceedings provide payments to creditors and customers case with only secured creditors Chapter case Chapter 11 case voluntary case Under the AICPA’s SOP 90-7, a reorganized company must meet a “reorganization value test” as one of the two conditions necessary for fresh start accounting Reorganization value approximates the a b c d fair fair book None value of the value of the value of the of the above entity’s total assets entity’s net assets entity’s net assets choices are correct ©2009 Pearson Education, Inc publishing as Prentice Hall 17-4 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO4 19 Under the AICPA’s SOP 90-7, “prepetition liabilities subject to compromise” are liabilities incurred before the Chapter 11 filing and are classified as a b c d LO4 20 residual claims contingent claims current operating claims unsecured and undersecured claims Which of the following statements is correct concerning companies emerging from reorganization under Chapter 11 when they not qualify for fresh start accounting? a The forgiveness of debt is reported as an operating gain b Quasi-reorganization accounting is used c The forgiveness of debt is reported as an extraordinary item d The forgiveness of debt is reported as an increase in contributed capital ©2009 Pearson Education, Inc publishing as Prentice Hall 17-5 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO2 Exercise Archery Corporation is liquidating under Chapter of the Bankruptcy Act The accounts of Archery at the time of filing are summarized as follows: Cash Accounts receivable-net Inventory Equipment-net Land Building-net Goodwill $ $ Accounts payable Wages and salaries Contributions due to pension plan Taxes payable Accrued interest payable (includes $10,000 from the mortgage payable and $2,000 from the note payable) Note payable Mortgage payable Capital stock Deficit $ ( $ Book Value 10,000 $ 60,000 110,000 70,000 20,000 200,000 42,000 512,000 Estimated Realizable Value 10,000 50,000 70,000 70,000 40,000 150,000 120,000 30,000 20,000 80,000 12,000 100,000 100,000 70,000 20,000 ) 512,000 The land and building are pledged as security for the mortgage payable as well as any accrued interest on the mortgage The note payable is secured with the equipment, but the interest on the note is unsecured Wages and salaries were accrued within the last 90 days and pension plan contributions were accrued within the last months; neither exceeds $4,000 per employee Liquidation expenses are expected to be $50,000 Required: Prepare a schedule showing the creditors and the expected payouts priority rankings of ©2009 Pearson Education, Inc publishing as Prentice Hall 17-6 the To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Banyo Corporation was a supplier to Archery Corporation and at the time of Archery’s bankruptcy filing, Banyo’s account receivable from Archery was $40,000 On the basis of the estimates, how much can Banyo expect to receive? LO2 Exercise Hinsch Company is in bankruptcy and is being liquidated under the provisions of Chapter of the bankruptcy code The trustee has converted all assets into $120,000 cash and has prepared the following list of approved claims: Customer deposits ($1,000 from each of two customers that ordered products that were never delivered) $ Property taxes payable 2,000 4,000 Accounts payable, unsecured 30,000 Trustee’s fees and other costs of liquidation 16,000 Mortgage payable, secured by property that was sold for $80,000 60,000 Note payable to bank, secured by all accounts receivable of which $30,000 were collected and $10,000 were written off as uncollectible 30,000 Required How much will the bank receive on the note payable? LO2 Exercise Ingham Corporation is being liquidated under Chapter of the Bankruptcy Act The trustee has determined that the unsecured claims will receive $.30 on the dollar Platinum Corporation holds a $35,000 mortgage note receivable from Ingham that is secured by equipment with a $17,500 book value and a $7,000 fair value Required: How much of the mortgage receivable will be recovered by Platinum? ©2009 Pearson Education, Inc publishing as Prentice Hall 17-7 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO2*& Exercise Buckley Corporation incurred major losses in 2005 and entered into voluntary Chapter bankruptcy in the early part of 2006 By July 1, all assets were converted into cash, the secured creditors were paid, and $74,000 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 $4,000 per employee) Unsecured note payable Accrued interest on the note payable Administrative expenses of the trustee Total $ $ 22,000 4,000 7,500 21,000 28,000 3,000 15,000 100,500 Required: Classify the claims by their Chapter priority ranking, and analyze which amounts will be paid and which amounts will be written off LO2 Exercise Jones Corporation is being liquidated under Chapter of the Bankruptcy Act The trustee has determined that the unsecured claims will receive $.50 on the dollar Kevin Corporation holds a $200,000 mortgage note receivable from Jones that is secured by marketable securities with a $150,000 book value and a $164,000 fair value Required: How much of the mortgage receivable will Kevin recover? LO2 Exercise Kresta Corporation is being liquidated under Chapter of the Bankruptcy Act The trustee has determined that the unsecured claims will receive $.25 on the dollar Loanstar Corporation holds an $80,000 mortgage note receivable from Kresta that is secured by marketable securities with an $88,000 book value and a $60,000 fair value Required: How much of the mortgage receivable will Loanstar recover? ©2009 Pearson Education, Inc publishing as Prentice Hall 17-8 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO3 Exercise On December 31, 2005, Goldcoast bank agreed to restructure an $800,000, 10% loan receivable from Fielding Corporation because of Fielding’s financial problems The loan was issued at par and at December 31, there was $40,000 of accrued interest for a six-month period Terms of the restructuring agreement are as follows: ** Reduce the loan from $800,000 to $600,000; ** Extend the maturity date by years from December 31, 2005 to December 31, 2007; and, ** Reduce the interest rate on the loan from 10% to 6% Present value assumptions: Present Present Present Present value value value value of of of of $1 $1 an an for years at 6% for years at 10% annuity of $1 for years at 6% annuity of $1 for years at 10% = = = = 0.8900 0.8264 1.8334 1.7355 Required: What amount of gain or loss from restructuring the loan will Fielding report for 2005? Compute the gain or loss that will be reported by Goldcoast Bank Assume that the bank has not recognized an impairment before the restructuring LO3 Exercise Logan Corporation owes Mango Finance Company $825,000 plus $53,750 of accrued interest Logan has a cash flow shortage and arranges for an equity settlement of the loan with Mango by issuing 55,000 shares of its $1.00 par value common stock to Mango on April 1, 2006 Logan common stock has a market value of $13.75 per share on April Required: Prepare Logan's restructuring journal entry to record the troubled ©2009 Pearson Education, Inc publishing as Prentice Hall 17-9 debt To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO3 Exercise Matrix Corporation owes Norman Finance Company $750,000 on a note payable plus $37,500 of accrued interest Matrix has a cash flow shortage and negotiates a debt restructuring with Norman by issuing 60,000 shares of its $1.00 par value common stock to Norman on January 1, 2006 Matrix's common stock has a market value of $10.10 per share on January 1st Required: Prepare Matrix's restructuring journal entry to record the troubled debt LO3 Exercise 10 On December 31, 2006, Galvin Bank agreed to restructure a $900,000, 10% loan receivable from Hines Corporation because of Hines’ financial problems The debt was issued at par and at December 31, there was accrued interest of $60,000 for six months Terms of the restructuring agreement are as follows: ** Reduce the loan from $900,000 to $600,000; ** Extend the maturity date of the loan by years from December 31, 2006 to December 31, 2008; and, ** Reduce the interest rate from 10% to 8% Present value assumptions: Present Present Present Present value value value value of of of of $1 $1 an an for years at 8% for years at 10% annuity of $1 for years at 8% annuity of $1 for years at 10% = = = = 0.8573 0.8264 1.7833 1.7355 Required: What amount of gain or loss from restructuring the loan will Hines report for 2006? Compute the gain or loss that will be reported by Galvin Bank Assume that the bank has not recognized an impairment before the restructuring ©2009 Pearson Education, Inc publishing as Prentice Hall 17-10 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com SOLUTIONS Multiple Choice Questions a d d c d d d c c 10 a 11 b 12 b 13 d 14 d 15 c 16 d 17 b 18 a 19 d 20 c ©2009 Pearson Education, Inc publishing as Prentice Hall 17-11 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise Requirement Amount of Claim Expected Payment Estimated available cash Secured claims: Mortgage payable & interest $ Partially secured claims: Note payable ($30,000 reclassified as unsecured) Unsecured priority claims: Estimated liquidation expenses Wages and salaries Pension fund liability Taxes payable Unsecured nonpriority claims: Accounts payable Unsecured portion of note payable Accrued interest on note payable $ 110,000 $ Estimated Remaining Cash $ 390,000 110,000 $ 280,000 100,000 70,000 210,000 50,000 30,000 20,000 80,000 50,000 30,000 20,000 80,000 160,000 130,000 110,000 30,000 120,000 30,000 2,000 Expected return on the dollar for unsecured nonpriority claims: $30,000/$150,000 = $.20 on the dollar Requirement Banyo’s estimated return: $40,000 claim x $.20 = $8,000 ©2009 Pearson Education, Inc publishing as Prentice Hall 17-12 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise Cash Mortgage payable, paid in full $ ( Note payable to bank, secured portion Priority claims ($16,000 of administrative costs + $2,000 of customer deposits + $4,000 property tax) Available for unsecured nonpriority claims Unsecured, nonpriority claims: Unsecured portion of note payable to bank Accounts payable Total unsecured, nonpriority claims ( ( $ $ 120,000 60,000 ) 60,000 30,000 ) 30,000 22,000 ) 8,000 $ 10,000 30,000 40,000 Amount paid to bank: $30,000 for secured portion + ($10,000 x 20) for unsecured portion = $ 32,000 $8,000 cash/$40,000 claims = $.20 on the dollar Exercise Mortgage note receivable Less: Portion secured by equipment Unsecured portion $ Estimated recovery on secured portion Estimated recovery on unsecured portion ($28,000 x $.30) = Recovery on mortgage note receivable $ 7,000 $ 8,400 15,400 ( $ 35,000 7,000 ) 28,000 ©2009 Pearson Education, Inc publishing as Prentice Hall 17-13 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise Requirement Unsecured priority claims: Administrative expenses $ Claims prior to the trustee’s appointment Wages payable Property taxes payable Unsecured Nonpriority Claims: Accounts payable Unsecured note Accrued interest on the note Claim Amount 15,000 $ $ Cash Left 59,000 4,000 4,000 55,000 21,000 21,000 34,000 7,500 7,500 26,500 Claim Amount $ To be Paid 15,000 To be Paid Written Off 22,000 $ 11,660 *$ 10,340 28,000 14,840 ** 13,160 3,000 3,000 ( $26,500/($22,000 + $28,000) = 53% * $22,000 x 53% = $11,660 **$28,000 x 53% = $14,840 Exercise Mortgage note receivable Less: Portion secured by marketable securities Unsecured portion $ $ 200,000 164,000 ) 36,000 Estimated recovery on secured portion Estimated recovery on unsecured portion ($36,000 x $.50) = Recovery on mortgage note receivable $ 164,000 $ 18,000 182,000 ©2009 Pearson Education, Inc publishing as Prentice Hall 17-14 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise Mortgage note receivable Less: Portion secured by marketable securities Unsecured portion $ $ 80,000 60,000 ) 20,000 Estimated recovery on secured portion Estimated recovery on unsecured portion (20,000 x $.25) = Recovery on mortgage note receivable $ 60,000 $ 5,000 65,000 ( Exercise Requirement Fielding’s gain on restructuring: Carrying value of the debt ($800,000 + $40,000 accrued interest) Total future cash flows ($600,000 + $72,000 interest) Gain on restructuring $ 840,000 ( $ 672,000 ) 168,000 Requirement Goldcoast Bank’s loss on restructuring: Carrying value of the loan before restructuring $ Present value of $600,000 due in years at 10% historical rate: $600,000 x 8264 = $495,840 Present value of $36,000 interest for years at 10% historical rate = $36,000 x 1.7355 = 62,478 Carrying value of the loan $558,318 ( 840,000 Loss on restructuring 281,682 $ 558,318 ) Exercise Note payable Accrued interest payable Common stock, $10 par Capital paid in excess of par Extraordinary gain on restructuring 825,000 53,750 55,000 756,250 67,500 ©2009 Pearson Education, Inc publishing as Prentice Hall 17-15 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise Note payable Accrued interest payable Common stock, $1 par Capital paid in excess of par Extraordinary gain on restructuring 750,000 37,500 40,000 546,000 201,500 Exercise 10 Requirement Hines’ gain on restructuring: Carrying value of the debt ($900,000 + $60,000 accrued interest) Total future cash flows ($600,000 + $96,000 interest) Gain on restructuring $ 960,000 ( $ 696,000 ) 264,000 Requirement Galvin’s loss on restructuring: Carrying value of the loan before restructuring $ Present value of $600,000 due in years at 10% historical rate: $600,000 x 8264 = $495,840 Present value of $48,000 interest for years at 10% historical rate = $48,000 x 1.7355 = 83,304 Carrying value of the loan $579,144 ( 960,000 Loss on restructuring 380,856 $ 579,144 ) ©2009 Pearson Education, Inc publishing as Prentice Hall 17-16 ... filed either under Chapter or Chapter 11 d will be determined by the trustee whether is shall be Chapter or Chapter 11 ©2009 Pearson Education, Inc publishing as Prentice Hall 17- 2 To download... review by the bankruptcy court d the debtor corporation files the petition in an involuntary filing LO1 11 Creditor committees are elected a in all bankruptcy cases b in Chapter cases c only in bankruptcy... Prentice Hall 17- 5 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com LO2 Exercise Archery Corporation is liquidating under Chapter of the Bankruptcy