Test bank advanced accounting 10e by beams chapter 17

The duties of a debtor in possession in a Chapter 11 bankruptcy case do not include a.. The first-to-last ranking order of priority of the following: I.stockholder claims II.unsecured

Chapter 17 Test Bank

CORPORATE LIQUIDATIONS, REORGANIZATIONS, AND DEBT RESTRUCTURINGS FOR FINANCIALLY DISTRESSED CORPORATIONS

Multiple Choice Questions

LO1

1 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

2 Which of the following must approve a Chapter 11 plan?

a The organization’s management

b The assigned trustee

c The entity’s stockholders

d The court and the creditors

LO1

3 When the accounting equation of a corporation computes a

negative ownership position, because liabilities are greater than assets, the firm is

a a distressed corporation

b a bankrupt corporation

c insolvent in the equity sense

d insolvent in the bankruptcy sense

LO1

4 A bankruptcy petition filed by a firm’s creditors is

a a Chapter 7 petition

b a petition for liquidation

c an involuntary petition

d a voluntary petition

LO1

5 The duties of a debtor in possession in a Chapter 11 bankruptcy

case do 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

6 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

7 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 or may not equal the creditor’s gain on restructuring

d may or may not equal the creditor’s loss on restructuring LO1

8 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

9 A case against a corporate debtor

a can be filed only under Chapter 7

b can be filed only under Chapter 11

c * can be filed either under Chapter 7 or Chapter 11

d will be determined by the trustee whether is shall be

LO1

10 A primary difference between voluntary and involuntary

bankruptcy petitions is that

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 7 cases

c only in bankruptcy cases arising from involuntary

petitions

d in Chapter 11 cases

LO2

12 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 7 bankruptcy case is

a I,II,IV, and III

b III,II,IV and I

c III,I,IV, and II

d II,IV,III,and I

LO2

13 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

LO2

14 Trustees in a bankruptcy cases have the duty to

a nullify affiliate transactions

b relegate tax payments to an unsecured status

c call creditor meetings on liquidation proceedings

d provide payments to creditors and customers

LO3

15 If a debtor has material gains on its debt restructurings,

these gains will be reported as

a operating gains of the debtor

b other non-operating gains of the debtor

c extraordinary gains of the debtor

d discontinued operations

LO3

16 A creditor will record assets transferred in full settlement of

a note receivable at the

a lower of cost or market value of the note receivable

b book value of the transferred assets

c fair market value of the note receivable

d fair market value of the transferred assets

LO3

17 A judge would permit a debtor-in-possession in a

a case with only secured creditors

b Chapter 7 case

c Chapter 11 case

d voluntary case

LO4

18 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 fair value of the entity’s total assets

b fair value of the entity’s net assets

c book value of the entity’s net assets

d None of the above choices are correct

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 residual claims

b contingent claims

c current operating claims

d unsecured and undersecured claims

LO4

20 Which of the following statements is correct concerning

companies emerging from reorganization under Chapter 11 when they do 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

LO2

Exercise 1

Archery Corporation is liquidating under Chapter 7 of the Bankruptcy

Act The accounts of Archery at the time of filing are summarized as

follows:

Book Value

Estimated Realizable Value

Contributions due to pension plan 20,000

Accrued interest payable (includes

$10,000 from the mortgage payable and

$2,000 from the note payable)

12,000

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 6 months;

neither exceeds $4,000 per employee Liquidation expenses are

expected to be $50,000

Required:

1 Prepare a schedule showing the priority rankings of the

creditors and the expected payouts

2 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 2

Hinsch Company is in bankruptcy and is being liquidated under the provisions of Chapter 7 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) $ 2,000

Trustee’s fees and other costs of liquidation 16,000 Mortgage payable, secured by property that was sold

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 3

Ingham Corporation is being liquidated under Chapter 7 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?

LO2*&

Exercise 4

Buckley Corporation incurred major losses in 2005 and entered into

voluntary Chapter 7 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:

Claims prior to the trustee’s appointment 4,000

Wages payable (all under $4,000 per employee) 21,000

Accrued interest on the note payable 3,000

Administrative expenses of the trustee 15,000

Required:

Classify the claims by their Chapter 7 priority ranking, and analyze which

amounts will be paid and which amounts will be written off

LO2

Exercise 5

Jones Corporation is being liquidated under Chapter 7 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 6

Kresta Corporation is being liquidated under Chapter 7 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:

LO3

Exercise 7

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 2 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 value of $1 for 2 years at 6% = 0.8900

Present value of $1 for 2 years at 10% = 0.8264

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

Present value of an annuity of $1 for 2 years at 10% = 1.7355

Required:

1 What amount of gain or loss from restructuring the loan will Fielding report for 2005?

2 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 8

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 1

Required:

Prepare Logan's journal entry to record the troubled debt restructuring

LO3

Exercise 9

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 journal entry to record the troubled debt restructuring

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 2 years from December

31, 2006 to December 31, 2008; and,

** Reduce the interest rate from 10% to 8%

Present value assumptions:

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

Present value of $1 for 2 years at 10% = 0.8264

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

Present value of an annuity of $1 for 2 years at 10% = 1.7355

Required:

1 What amount of gain or loss from restructuring the loan will Hines report for 2006?

2 Compute the gain or loss that will be reported by Galvin Bank Assume that the bank has not recognized an impairment before the restructuring

SOLUTIONS

Multiple Choice Questions

1 a

2 d

3 d

4 c

5 d

6 d

7 d

8 c

9 c

10 a

11 b

12 b

13 d

14 d

15 c

16 d

17 b

18 a

19 d

20 c

Exercise 1

Requirement 1

Amount

of Claim

Expected Payment

Estimated Remaining Cash

Mortgage payable & interest $ 110,000 $ 110,000 $ 280,000

reclassified as unsecured) 100,000 70,000 210,000

Estimated liquidation expenses 50,000 50,000 160,000 Wages and salaries 30,000 30,000 130,000 Pension fund liability 20,000 20,000 110,000

Unsecured portion of note

payable

30,000 Accrued interest on note

payable

Expected return on the dollar for unsecured nonpriority claims:

$30,000/$150,000 = $.20 on the dollar

Requirement 2

Banyo’s estimated return: $40,000 claim x $.20 = $8,000

Exercise 2

Mortgage payable, paid in full ( 60,000 )

Note payable to bank, secured portion ( 30,000 )

30,000 Priority claims ($16,000 of administrative costs +

$2,000 of customer deposits + $4,000 property tax) ( 22,000 )

Available for unsecured nonpriority claims $ 8,000

Unsecured, nonpriority claims:

Unsecured portion of note payable to bank $ 10,000

Total unsecured, nonpriority claims $ 40,000

$8,000 cash/$40,000 claims = $.20 on the dollar

$30,000 for secured portion + ($10,000 x 20) for

Exercise 3

Less: Portion secured by equipment ( 7,000 )

Estimated recovery on secured portion $ 7,000

Estimated recovery on unsecured portion

Recovery on mortgage note receivable $ 15,400

Exercise 4

Requirement 1

Unsecured priority claims:

Claim Amount

To be Paid

Cash Left Administrative expenses $ 15,000 $ 15,000 $ 59,000 Claims prior to the trustee’s

Property taxes payable 7,500 7,500 26,500

Unsecured Nonpriority Claims: Claim

Amount

To be Paid

Written Off Accounts payable $ 22,000 $ 11,660 *$ 10,340

Accrued interest on the note 3,000 0 3,000

$26,500/($22,000 + $28,000)

= 53%

* $22,000 x 53% = $11,660

**$28,000 x 53% = $14,840

Exercise 5

Less: Portion secured by marketable securities ( 164,000 )

Estimated recovery on secured portion $ 164,000 Estimated recovery on unsecured portion

Recovery on mortgage note receivable $ 182,000