Deck 10: Insolvencyliquidation and Reorganization

Question 1

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.

Answer 1

D

Question 2

Lyme 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 Lyme report as a gain on its income statement?

A) $0.
B) $180,000.
C) $225,000.
D) $405,000.

Answer 2

C

Question 3

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.

Answer 3

D

Question 4

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.

Question 5

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

A) bankrupt.
B) overdrawn.
C) insolvent.
D) liquidating.

Question 6

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.

Question 7

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.

Question 8

The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by North Co. to Bell Co. in full settlement of North's liability to Bell: What amount should Bell 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.

Question 9

The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by North Co. to Bell Co. in full settlement of North's liability to Bell: What amount should North report as ordinary gain (loss) on transfer of real estate?

A) $(30,000).
B) $30,000.
C) $120,000.
D) $150,000.

Question 10

Ford 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 Ford report as a gain on its income statement?

A) $0.
B) $100,000.
C) $125,000.
D) $225,000.

Question 11

Splat Company filed a voluntary bankruptcy petition, and the statement of affairs reflected the following amounts: 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.

Question 12

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.

Question 13

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.

Question 14

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.

Question 15

When fresh-start reporting is used according to Statement of Position (SOP) 90-7 (now incorporated in FSB ASC topic 852), 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.

Question 16

Dobby 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 Dobby 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.

Question 17

A bankruptcy petition filed by a firm is a:

A) chapter petition.
B) involuntary petition.
C) voluntary petition.
D) chapter 11 petition.

Question 18

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.

Question 19

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.

Question 20

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.

Question 21

The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by MSG Co. to Beta Co. in full settlement of MSG's liability to Beta: What amount should Beta 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.

Question 22

Creditors are classified by law as either secured or unsecured. Distinguish among fully secured, partially secured, and unsecured creditors.

Question 23

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.

Question 24

The following data are taken from the statement of affairs of Motor Sports Company.
Assets pledged with fully secured creditors Required:
Compute the amount that will be paid to each class of creditor.

Question 25

On January 1, 2016, Terminator, Inc. owed 9th National Bank $12 million on a 10% note due December 31, 2017. Interest was last paid on December 31, 2015. Terminator was experiencing severe financial difficulties and asked 9th National Bank to modify the terms of the debt agreement. After negotiation 9th National Bank 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, 2017, and
- Reduce the unpaid principal amount to $9,600,000.
Required:
Prepare the journal entries for Terminator, Inc. necessitated by the restructuring of the debt at (1) January 1, 2016, (2) December 31, 2017, and (3) December 31, 2015.

Question 26

On February 1, 2017, Hillary Company filed a petition for reorganization under the bankruptcy statutes. The court approved the plan on September 1, 2017, including the following provisions:
1. Accrued expenses of $21,930, representing priority items, are to be paid in full.
2. Hillary 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. Hillary 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, 2017, 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 Hillary Company to give effect to the preceding provisions.

Question 27

On January 1, 2017, Deal Mart owed Money Bank $1,600,000, under an 8% note with three years remaining to maturity. Due to financial difficulties, Deal Mart was unable to pay the previous year's interest. Money Bank agreed to settle Deal Mart's debt in exchange for land having a fair market value of $1,310,000. Deal Mart purchased the land in 2003 for $1,000,000.
Required:
Prepare the journal entries to record the restructuring of the debt by Deal Mart.

Question 28

Poor Company filed a voluntary bankruptcy petition, and the settlement of affairs reflected the following amounts: 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.

Question 29

Down Dog Corporation filed a petition under Chapter 7 of the U.S. Bankruptcy Act on June 30, 2017. Data relevant to its financial position as of this date are: 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.

Question 30

O'Donnell Corporation incurred major losses in 2016 and entered into voluntary Chapter 7 bankruptcy in the early part of 2017. 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. Required:
Classify the claims by their Chapter 7 priority ranking, and analyze which amounts will be paid and which amounts will be written off.

Question 31

Tangent 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. Arrow holds a note receivable from Tangent 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 Arrow on this note is:

A) $30,000.
B) $48,000.
C) $60,000.
D) $90,000.

Question 32

The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by MSG Co. to Beta Co. in full settlement of MSG's liability to Beta: What amount should MSG report as ordinary gain (loss) on transfer of real estate?

A) $(25,000).
B) $25,000.
C) $100,000.
D) $125,000.

Question 33

On December 31, 2017, Pilot's Credit Union agreed to restructure a $900,000, 8% loan receivable from Norma Corporation because of Norma'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, 2017 to December 31, 2019;
- 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 Pilot's Credit Union.

Question 34

On January 2, 2017 Cretin Co., was indebted to Fourth National Bank under a $12 million, 10% unsecured note. The note was signed January 2, 2015, and was due December 31, 2020. Annual interest was last paid on December 31, 2015. Cretin Co. negotiated a restructuring of the terms of the debt agreement due to financial difficulties.
Required:
Prepare all journal entries for Cretin Co., to record the restructuring and any remaining transactions relating to the debt under each independent assumption.
A. Fourth National Bank agreed to settle the debt in exchange for land which cost Cretin Co. $8,500,000 and has a fair market value of $10,000,000.
B. Fourth National 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.