Deck 15: Bankruptcy and Reorganization

Question 1

When a firm is in financial difficulty, which of the following occurs outside the judicial system?

A) Chapter 7 liquidation
B) Chapter 11 reorganization
C) Chapter 13 bankruptcy
D) Troubled debt restructuring

Answer 1

Troubled debt restructuring

Question 2

Which statement is true concerning a Chapter 11 reorganization?

A) A Chapter 11 reorganization is available to businesses but not individuals.
B) The plan of reorganization must include nomination of a trustee to take control of assets until the reorganization is complete.
C) The plan of reorganization must be approved by creditors representing two-thirds of dollar claims.
D) Creditors' claims must be settled on a pro rata basis.

Answer 2

The plan of reorganization must be approved by creditors representing two-thirds of dollar claims.

Question 3

Which statement is true concerning a Chapter 7 liquidation?

A) Chapter 7 is applicable to businesses but not individuals.
B) Proceedings from the sale of assets are distributed to creditors on a pro rata basis.
C) A company may be allowed to remain in possession of its assets during liquidation.
D) Obligations to employees are not discharged once Chapter 7 proceedings are complete.

Answer 3

Proceedings from the sale of assets are distributed to creditors on a pro rata basis.

Question 4

Chapter 9 bankruptcies apply to:

A) Corporations.
B) Individuals.
C) Government municipalities.
D) Not-for-profit organizations.

Question 5

Chapter 11 reorganization, if the plan of reorganization allows the firm to remain in control of its assets, the firm is called a

A) Discharged organization.
B) Debtor-in-possession.
C) Voluntary reorganization.
D) bankrupt-organization-in-process.

Question 6

In a Chapter 7 liquidation, when a firm's debts are discharged, it means that:

A) The debts are in the process of being evaluated by the courts.
B) The debts have priority and are paid ahead of other debts.
C) The debts are cancelled, with the creditors having no further claim.
D) The debts are subject to partial payment, depending on liquidation assets.

Question 7

Creditors often prefer reorganization to liquidation because:

A) The firm's ability to pay its debts is higher when it is allowed to continue operations.
B) The courts take control of the firm's assets, preventing the firm from selling them off without paying creditors.
C) More debts are required to be paid.
D) The creditors are in control of the liquidation and payment process.

Question 8

Chapter 13 of the Bankruptcy Code applies the

A) reorganization concept to individuals.
B) reorganization concept to not-for-profit organizations.
C) liquidation concept to individuals.
D) liquidation concept to not-for-profit organizations.

Question 9

Use the following information for bellow Questions
On May 1, 2020, Rolly Industries begins liquidation activities and adopts the liquidation basis of accounting. The book value of its reported assets total $700,000, including $10,000 in cash, and the book value of its liabilities, consisting of bank loans, total $600,000. Expected proceeds from reported assets other than cash are:
• Receivables, $50,000
• Inventories, $150,000
• Plant and equipment, $300,000
Previously unreported identifiable intangible assets have a fair value of $80,000. Expected costs of liquidating assets are $20,000, and negotiations are in process to reduce Rolly's bank loans by 25%.

-The May 1, 2020 statement of net assets in liquidation reports total assets in the amount of:

A) $710,000.
B) $590,000.
C) $510,000.
D) $500,000.

Question 10

Use the following information for bellow Questions
On May 1, 2020, Rolly Industries begins liquidation activities and adopts the liquidation basis of accounting. The book value of its reported assets total $700,000, including $10,000 in cash, and the book value of its liabilities, consisting of bank loans, total $600,000. Expected proceeds from reported assets other than cash are:
• Receivables, $50,000
• Inventories, $150,000
• Plant and equipment, $300,000
Previously unreported identifiable intangible assets have a fair value of $80,000. Expected costs of liquidating assets are $20,000, and negotiations are in process to reduce Rolly's bank loans by 25%.

-The May 1, 2020 statement of net assets in liquidation reports total liabilities in the amount of:

A) $600,000.
B) $450,000.
C) $620,000.
D) $470,000.

Question 11

Use the following additional information to answer bellow Questions
During the two months ending June 30, 2020, the following transactions occur:
• Receivables of $48,000 are collected and the rest are determined to be uncollectible.
• Inventories are sold for $100,000.
• Plant and equipment is sold for $125,000.
• The identifiable intangible assets are sold for $72,000.
• Liquidation costs of $10,000 are paid.
• Bank loans of $325,000 are paid, and creditors holding $275,000 of loans agree to accept $250,000 as full payment.
• Fair values of remaining assets other than cash are:
• Inventories, $55,000
• Plant and equipment, $185,000
• Estimated future liquidation costs are $6,000.

-On the statement of changes in net assets in liquidation for the two months ending June 30, 2020, the remeasurement gain or loss on accrued liquidation costs is:

A) $4,000 gain
B) $4,000 loss
C) $10,000 gain
D) $10,000 loss

Question 12

Use the following additional information to answer bellow Questions
During the two months ending June 30, 2020, the following transactions occur:
• Receivables of $48,000 are collected and the rest are determined to be uncollectible.
• Inventories are sold for $100,000.
• Plant and equipment is sold for $125,000.
• The identifiable intangible assets are sold for $72,000.
• Liquidation costs of $10,000 are paid.
• Bank loans of $325,000 are paid, and creditors holding $275,000 of loans agree to accept $250,000 as full payment.
• Fair values of remaining assets other than cash are:
• Inventories, $55,000
• Plant and equipment, $185,000
• Estimated future liquidation costs are $6,000.

-On the statement of changes in net assets in liquidation for the two months ending June 30, 2020, the remeasurement gain or loss on bank loans is:

A) $300,000 loss
B) $25,000 gain
C) $25,000 loss
D) $50,000 gain

Question 13

Use the following additional information to answer bellow Questions
During the two months ending June 30, 2020, the following transactions occur:
• Receivables of $48,000 are collected and the rest are determined to be uncollectible.
• Inventories are sold for $100,000.
• Plant and equipment is sold for $125,000.
• The identifiable intangible assets are sold for $72,000.
• Liquidation costs of $10,000 are paid.
• Bank loans of $325,000 are paid, and creditors holding $275,000 of loans agree to accept $250,000 as full payment.
• Fair values of remaining assets other than cash are:
• Inventories, $55,000
• Plant and equipment, $185,000
• Estimated future liquidation costs are $6,000.

-On the statement of changes in net assets in liquidation for the two months ending June 30, 2020, the remeasurement gain or loss on plant and equipment is:

A) $15,000 loss
B) $125,000 gain
C) $75,000 loss
D) $10,000 gain

Question 14

On the statement of net assets in liquidation at June 30, 2020, total assets are:

A) $240,000
B) $266,000
C) $260,000
D) $250,000

Question 15

On the statement of net assets in liquidation at June 30, 2020, total liabilities are:

A) $256,000
B) $250,000
C) $264,000
D) $275,000

Question 16

Which statement is false concerning the liquidation basis of accounting?

A) Liabilities are reported at full book value, unless terms have been legally renegotiated.
B) Expected liquidation costs are netted against asset fair values.
C) Expected compensation to be paid is accrued as a liability, even if it has not yet been earned.
D) Previously unreported identifiable intangible assets are reported at fair value.

Question 17

A company entering liquidation has reported assets with a book value of $900,000 and a liquidation value of $650,000. It also has previously unreported customer lists with a fair value of $50,000. Estimated liquidation costs are $40,000. The company's statement of net assets in liquidation reports total assets of:

A) $660,000
B) $900,000
C) $700,000
D) $650,000

Question 18

A company entering liquidation has reported assets with a book value of $900,000 and a liquidation value of $600,000, and previously unreported customer lists with a fair value of $50,000. During the next month, it sells assets for $200,000. Remaining assets have a fair value of $460,000. The company's statement of changes in net assets in liquidation for the month reports a remeasurement gain or loss on assets of:

A) $240,000 loss
B) $60,000 gain
C) $140,000 loss
D) $10,000 gain

Question 19

Following GAAP, the liquidation basis of accounting is appropriate

A) If the liquidation value of the company's assets is less than the company's liabilities.
B) If liquidation values are documented.
C) When it is extremely likely that liquidation will occur.
D) When a company declares bankruptcy.

Question 20

Following the liquidation basis of accounting, the total income effect of liquidation is reported

A) As liquidation occurs.
B) At its estimated value, at the start of the liquidation process.
C) At the end of the liquidation process.
D) When obligations are paid.

Question 21

Following the liquidation basis of accounting, employee compensation earned during the liquidation period is

A) Accrued in full at its estimated amount at the start of the liquidation process.
B) Accrued as it is earned.
C) Reported when paid.
D) Not reported.

Question 22

The focus of the liquidation basis of accounting is to

A) Measure cash flows arising from the liquidation of assets and their use to pay liabilities.
B) Report liquidation gains and losses by comparing book values with liquidation values.
C) Anticipate the results of liquidation.
D) Report liquidation transactions accurately as they occur.

Question 23

Using the liquidation basis of accounting, previously unreported identifiable intangible assets are reported

A) If they are contractual or separable.
B) If they are sold for cash.
C) If proceeds from their sale can be used to pay liabilities.
D) Never.

Question 24

Which one of the following is a fully secured liability in a Chapter 7 bankruptcy?

A) $250,000 in administrative costs owed to the trustee.
B) $100,000 in customer deposits.
C) A $200,000 loan secured by equipment with a book value of $300,000 and a fair value of $225,000.
D) A $150,000 loan secured by equipment with a book value of $200,000 and a fair value of $135,000.

Question 25

Which one of the following is a partially secured liability in a Chapter 7 bankruptcy?

A) $250,000 in administrative costs owed to the trustee.
B) $100,000 in customer deposits.
C) A $200,000 loan secured by equipment with a book value of $300,000 and a fair value of $225,000.
D) A $150,000 loan secured by equipment with a book value of $200,000 and a fair value of $135,000.

Question 26

Which one of the following is not an unsecured liability with priority in a Chapter 7 bankruptcy?

A) $100,000 in customer deposits.
B) $80,000 in income taxes.
C) $10,000 of a $50,000 loan secured by property with a fair value of $40,000.
D) $20,000 in compensation owed to employees for work performed a month prior to the bankruptcy filing.

Question 27

Which one of the following is an unsecured liability with priority in a Chapter 7 bankruptcy?

A) Customer deposits for goods or services not delivered.
B) Amounts due to pension plans for services rendered 9 months ago.
C) Compensation owed to employees for services rendered 7 months ago.
D) $20,000 of a $100,000 loan secured with property having a fair value of $80,000.

Question 28

A company has the following balance sheet:
$$\begin{array} { | l | r | l | r | } \hline \text { Plant and equipment } & \$ 500,000 & \text { Loans payable } & \$ 150,000 \\\hline & & \text { Mortgage payable } & 300,000 \\\hline & & \text { Shareholders' equity } & \underline { 50,000 } \\\hline \text { Total } & \underline { \$ 500,000 } & \text { Total } & \underline { \$ 500,000 } \\\hline\end{array}$$ The plant and equipment has a realizable value of $350,000, and is pledged as security for the mortgage. The estimated deficiency to unsecured creditors is:

A) $ 50,000
B) $100,000
C) $150,000
D) $200,000

Question 29

A company has the following balance sheet:
$$\begin{array} { | l | r | l | r | } \hline \text { Inventory } & \$ 60,000 & \text { Accounts payable } & \$ 75,000 \\\hline \text { Equipment, net } & 150,000 & \text { Loan payable } & 180,000 \\\hline & & \text { Shareholders' equity } & ( 45,000 ) \\\hline \text { Total } & \$ 210,000 & \text { Total } & \$ 210,000 \\\hline\end{array}$$ The inventory has a realizable value of $50,000, and the equipment has a realizable value of $140,000. The equipment secures the loan payable and the accounts payable are unsecured. The estimated deficiency to unsecured creditors is:

A) $115,000
B) $ 45,000
C) $140,000
D) $ 65,000

Question 30

Use the following information to answer Questions.
A statement of affairs shows $30,000 of assets pledged to partially secured creditors, liabilities of $65,000 to partially secured creditors, liabilities of $25,000 to unsecured creditors with priority, and liabilities of $90,000 to other unsecured creditors.

-What are total unsecured liabilities, as reported on the statement of affairs?

A) $ 90,000
B) $100,000
C) $125,000
D) $155,000

Question 31

Use the following information to answer Questions.
A statement of affairs shows $30,000 of assets pledged to partially secured creditors, liabilities of $65,000 to partially secured creditors, liabilities of $25,000 to unsecured creditors with priority, and liabilities of $90,000 to other unsecured creditors.

-If the estimated deficiency to unsecured creditors is $40,000, what is the amount of total free assets, as reported on the statement of affairs?

A) $ 50,000
B) $ 75,000
C) $ 85,000
D) $110,000

Question 32

A company owes a bank loan of $250,000. The loan is secured by the company's inventory, which has a book value of $275,000 and an estimated realizable value of $200,000. On a statement of affairs, the liability to the bank would be classified as:

A) $250,000 fully secured
B) $200,000 secured and $25,000 unsecured
C) $200,000 secured and $50,000 unsecured with priority
D) $200,000 secured and $50,000 unsecured

Question 33

Use the following information to answer Questions bellow
A statement of affairs shows $50,000 of assets pledged to fully secured creditors, $100,000 of assets pledged to partially secured creditors, $85,000 of assets not held as security for any liabilities, liabilities of $40,000 to fully secured creditors, $125,000 to partially secured creditors, $20,000 to unsecured creditors with priority, and $120,000 to other unsecured creditors.

-Total unsecured liabilities, are reported on the statement of affairs in the amount of:

A) $120,000.
B) $140,000.
C) $145,000.
D) $165,000.

Question 34

Use the following information to answer Questions bellow
A statement of affairs shows $50,000 of assets pledged to fully secured creditors, $100,000 of assets pledged to partially secured creditors, $85,000 of assets not held as security for any liabilities, liabilities of $40,000 to fully secured creditors, $125,000 to partially secured creditors, $20,000 to unsecured creditors with priority, and $120,000 to other unsecured creditors.

-What is the estimated deficiency to unsecured creditors, as reported on the statement of affairs?

A) $90,000
B) $70,000
C) $50,000
D) $80,000

Question 35

Which one of the following reported assets of a corporation is most likely to realize the smallest percentage of its book value in bankruptcy?

A) Accounts receivable
B) Plant & equipment
C) Goodwill
D) Inventories

Question 36

Use the following information to answer Questions bellow
A company's statement of affairs reports the following:
• Assets pledged to fully secured creditors, $500,000.
• Assets pledged to partially secured creditors, $250,000.
• Fully secured liabilities, $325,000
• Partially secured liabilities, $400,000.
• Free assets, $81,000.
• Unsecured liabilities with priority, $40,000.
• Unsecured liabilities, $210,000.

-What is the estimated deficiency to unsecured creditors, as reported on the statement of affairs?

A) $144,000
B) $184,000
C) $104,000
D) $200,000

Question 37

Use the following information to answer Questions bellow
A company's statement of affairs reports the following:
• Assets pledged to fully secured creditors, $500,000.
• Assets pledged to partially secured creditors, $250,000.
• Fully secured liabilities, $325,000
• Partially secured liabilities, $400,000.
• Free assets, $81,000.
• Unsecured liabilities with priority, $40,000.
• Unsecured liabilities, $210,000.

-How much can unsecured creditors with priority expect to be paid per dollar of debt?

A) $0.60
B) $1.00
C) $0.85
D) $0.375

Question 38

Use the following information to answer Questions bellow
A company's statement of affairs reports the following:
• Assets pledged to fully secured creditors, $500,000.
• Assets pledged to partially secured creditors, $250,000.
• Fully secured liabilities, $325,000
• Partially secured liabilities, $400,000.
• Free assets, $81,000.
• Unsecured liabilities with priority, $40,000.
• Unsecured liabilities, $210,000.

-How much can unsecured creditors expect to be paid per dollar of debt?

A) $0.60
B) $1.00
C) $0.85
D) $0.375

Question 39

Use the following information to answer Questions bellow
A company's statement of affairs reports the following:
• Assets pledged to fully secured creditors, $500,000.
• Assets pledged to partially secured creditors, $250,000.
• Fully secured liabilities, $325,000
• Partially secured liabilities, $400,000.
• Free assets, $81,000.
• Unsecured liabilities with priority, $40,000.
• Unsecured liabilities, $210,000.

-How much can partially secured creditors expect to be paid per dollar of debt?

A) $0.60
B) $1.00
C) $0.85
D) $0.375

Question 40

A bankrupt firm has a loan payable of $400,000, secured by property with a realizable value of $200,000. The expected recovery percentage for the firm's unsecured creditors is 50%. What is the expected recovery percentage on the loan?

A) 50%
B) 60%
C) 75%
D) 85%

Question 41

Use the following information for Questions bellow
Givingup Company is entering bankruptcy under Chapter 7 of the bankruptcy laws. The following information is available:
$$\begin{array} { l r } \text { Realizable value of assets pledg ed to fully-secured creditors } & \$ 600,000 \\\text { Realizable value of assets pledged to partially-secured creditors } & 350,000 \\\text { Realizable value of unsecured assets } & 282,500 \\\text { Liabilities, fully secured } & 500,000 \\\text { Liabilities, partially secured } & 900,000 \\\text { Liabilities, unsecured with priority } & 50,000 \\\text { Liabilities, unsecured } & 400,000\end{array}$$

-Givingup's statement of affairs reports net free assets of:

A) $382,500
B) $282,500
C) $332,500
D) $232,500

Question 42

Use the following information for Questions bellow
Givingup Company is entering bankruptcy under Chapter 7 of the bankruptcy laws. The following information is available:
$$\begin{array} { l r } \text { Realizable value of assets pledg ed to fully-secured creditors } & \$ 600,000 \\\text { Realizable value of assets pledged to partially-secured creditors } & 350,000 \\\text { Realizable value of unsecured assets } & 282,500 \\\text { Liabilities, fully secured } & 500,000 \\\text { Liabilities, partially secured } & 900,000 \\\text { Liabilities, unsecured with priority } & 50,000 \\\text { Liabilities, unsecured } & 400,000\end{array}$$

-Givingup's statement of affairs reports total unsecured liabilities, excluding those with priority, of:

A) $ 550,000
B) $ 950,000
C) $ 450,000
D) $1,300,000

Question 43

Use the following information for Questions bellow
Givingup Company is entering bankruptcy under Chapter 7 of the bankruptcy laws. The following information is available:
$$\begin{array} { l r } \text { Realizable value of assets pledg ed to fully-secured creditors } & \$ 600,000 \\\text { Realizable value of assets pledged to partially-secured creditors } & 350,000 \\\text { Realizable value of unsecured assets } & 282,500 \\\text { Liabilities, fully secured } & 500,000 \\\text { Liabilities, partially secured } & 900,000 \\\text { Liabilities, unsecured with priority } & 50,000 \\\text { Liabilities, unsecured } & 400,000\end{array}$$

-Givingup's statement of affairs reports an estimated deficiency to unsecured creditors of:

A) $332,500
B) $400,000
C) $500,000
D) $617,500

Question 44

Use the following information for Questions bellow
Givingup Company is entering bankruptcy under Chapter 7 of the bankruptcy laws. The following information is available:
$$\begin{array} { l r } \text { Realizable value of assets pledg ed to fully-secured creditors } & \$ 600,000 \\\text { Realizable value of assets pledged to partially-secured creditors } & 350,000 \\\text { Realizable value of unsecured assets } & 282,500 \\\text { Liabilities, fully secured } & 500,000 \\\text { Liabilities, partially secured } & 900,000 \\\text { Liabilities, unsecured with priority } & 50,000 \\\text { Liabilities, unsecured } & 400,000\end{array}$$

-The expected recovery percentage for Givingup's unsecured creditors without priority (rounded to nearest whole percentage if necessary) is:

A) 35%
B) 60%
C) 26%
D) 56%

Question 45

Use the following information to answer Questions bellow
A company enters Chapter 7 bankruptcy proceedings. Its balance sheet, prepared using GAAP for a company with continuing operations, is as follows:
$$\begin{array} { | l | r | l | r | } \hline \text { Cash } & \$ 15,000 & \text { Accounts payable } & \$ 90,000 \\\hline \text { Inventories } & 100,000 & \text { Loans payable } & 300,000 \\\hline \text { Plant and equipment, net } & 250,000 & \text { Equity \{deficit\} } & \$ 25,000 \} \\\hline \text { Total } & \$ 365,000 & \text { Total } & \$ 365,000 \\\hline\end{array}$$ The plant and equipment is security for one of the loans, with a balance of $130,000. The other liabilities are unsecured. The following transactions occur:
• Inventories with a book value of $60,000 were sold for $40,000.
• The plant and equipment was sold for $200,000. The loan secured by the plant and equipment was paid.
• Wages and administrative expenses of $10,000 were accrued.
• An initial payment of 40 cents per dollar of indebtedness was paid to the unsecured creditors.

-The statement of realization and liquidation reports total "assets to be realized" of:

A) $260,000
B) $365,000
C) $240,000
D) $350,000

Question 46

Use the following information to answer Questions bellow
A company enters Chapter 7 bankruptcy proceedings. Its balance sheet, prepared using GAAP for a company with continuing operations, is as follows:
$$\begin{array} { | l | r | l | r | } \hline \text { Cash } & \$ 15,000 & \text { Accounts payable } & \$ 90,000 \\\hline \text { Inventories } & 100,000 & \text { Loans payable } & 300,000 \\\hline \text { Plant and equipment, net } & 250,000 & \text { Equity \{deficit\} } & \$ 25,000 \} \\\hline \text { Total } & \$ 365,000 & \text { Total } & \$ 365,000 \\\hline\end{array}$$ The plant and equipment is security for one of the loans, with a balance of $130,000. The other liabilities are unsecured. The following transactions occur:
• Inventories with a book value of $60,000 were sold for $40,000.
• The plant and equipment was sold for $200,000. The loan secured by the plant and equipment was paid.
• Wages and administrative expenses of $10,000 were accrued.
• An initial payment of 40 cents per dollar of indebtedness was paid to the unsecured creditors.

-The statement of realization and liquidation reports total "assets not realized" of:

A) $ 61,000
B) $ 40,000
C) $ 60,000
D) $150,000

Question 47

Use the following information to answer Questions bellow
A company enters Chapter 7 bankruptcy proceedings. Its balance sheet, prepared using GAAP for a company with continuing operations, is as follows:
$$\begin{array} { | l | r | l | r | } \hline \text { Cash } & \$ 15,000 & \text { Accounts payable } & \$ 90,000 \\\hline \text { Inventories } & 100,000 & \text { Loans payable } & 300,000 \\\hline \text { Plant and equipment, net } & 250,000 & \text { Equity \{deficit\} } & \$ 25,000 \} \\\hline \text { Total } & \$ 365,000 & \text { Total } & \$ 365,000 \\\hline\end{array}$$ The plant and equipment is security for one of the loans, with a balance of $130,000. The other liabilities are unsecured. The following transactions occur:
• Inventories with a book value of $60,000 were sold for $40,000.
• The plant and equipment was sold for $200,000. The loan secured by the plant and equipment was paid.
• Wages and administrative expenses of $10,000 were accrued.
• An initial payment of 40 cents per dollar of indebtedness was paid to the unsecured creditors.

-The statement of realization and liquidation reports "liabilities not liquidated" of:

A) $166,000
B) $156,000
C) $234,000
D) $224,000

Question 48

Use the following information to answer Questions bellow
A company enters Chapter 7 bankruptcy proceedings. Its balance sheet, prepared using GAAP for a company with continuing operations, is as follows:
$$\begin{array} { | l | r | l | r | } \hline \text { Cash } & \$ 15,000 & \text { Accounts payable } & \$ 90,000 \\\hline \text { Inventories } & 100,000 & \text { Loans payable } & 300,000 \\\hline \text { Plant and equipment, net } & 250,000 & \text { Equity \{deficit\} } & \$ 25,000 \} \\\hline \text { Total } & \$ 365,000 & \text { Total } & \$ 365,000 \\\hline\end{array}$$ The plant and equipment is security for one of the loans, with a balance of $130,000. The other liabilities are unsecured. The following transactions occur:
• Inventories with a book value of $60,000 were sold for $40,000.
• The plant and equipment was sold for $200,000. The loan secured by the plant and equipment was paid.
• Wages and administrative expenses of $10,000 were accrued.
• An initial payment of 40 cents per dollar of indebtedness was paid to the unsecured creditors.

-The statement of realization and liquidation reports "liabilities to be liquidated" of:

A) $166,000
B) $400,000
C) $390,000
D) $260,000

Question 49

Use the following information to answer Questions bellow
A company enters Chapter 7 bankruptcy proceedings. Its balance sheet, prepared using GAAP for a company with continuing operations, is as follows:
$$\begin{array} { | l | r | l | r | } \hline \text { Cash } & \$ 15,000 & \text { Accounts payable } & \$ 90,000 \\\hline \text { Inventories } & 100,000 & \text { Loans payable } & 300,000 \\\hline \text { Plant and equipment, net } & 250,000 & \text { Equity \{deficit\} } & \$ 25,000 \} \\\hline \text { Total } & \$ 365,000 & \text { Total } & \$ 365,000 \\\hline\end{array}$$ The plant and equipment is security for one of the loans, with a balance of $130,000. The other liabilities are unsecured. The following transactions occur:
• Inventories with a book value of $60,000 were sold for $40,000.
• The plant and equipment was sold for $200,000. The loan secured by the plant and equipment was paid.
• Wages and administrative expenses of $10,000 were accrued.
• An initial payment of 40 cents per dollar of indebtedness was paid to the unsecured creditors.

-The statement of realization and liquidation reports "loss on realization" of:

A) $50,000
B) $80,000
C) $70,000
D) $30,000

Question 50

Use the following information to answer Questions bellow
A company enters Chapter 7 bankruptcy proceedings. Its balance sheet, prepared using GAAP for a company with continuing operations, is as follows:
$$\begin{array} { | l | r | l | r | } \hline \text { Cash } & \$ 15,000 & \text { Accounts payable } & \$ 90,000 \\\hline \text { Inventories } & 100,000 & \text { Loans payable } & 300,000 \\\hline \text { Plant and equipment, net } & 250,000 & \text { Equity \{deficit\} } & \$ 25,000 \} \\\hline \text { Total } & \$ 365,000 & \text { Total } & \$ 365,000 \\\hline\end{array}$$ The plant and equipment is security for one of the loans, with a balance of $130,000. The other liabilities are unsecured. The following transactions occur:
• Inventories with a book value of $60,000 were sold for $40,000.
• The plant and equipment was sold for $200,000. The loan secured by the plant and equipment was paid.
• Wages and administrative expenses of $10,000 were accrued.
• An initial payment of 40 cents per dollar of indebtedness was paid to the unsecured creditors.

-On the receiver's balance sheet at the end of the period, total assets are:

A) $ 40,000
B) $ 61,000
C) $111,000
D) $ 90,000

Question 51

Use the following information to answer Questions bellow
A company enters Chapter 7 bankruptcy proceedings. Its balance sheet, prepared using GAAP for a company with continuing operations, is as follows:
$$\begin{array} { | l | r | l | r | } \hline \text { Cash } & \$ 15,000 & \text { Accounts payable } & \$ 90,000 \\\hline \text { Inventories } & 100,000 & \text { Loans payable } & 300,000 \\\hline \text { Plant and equipment, net } & 250,000 & \text { Equity \{deficit\} } & \$ 25,000 \} \\\hline \text { Total } & \$ 365,000 & \text { Total } & \$ 365,000 \\\hline\end{array}$$ The plant and equipment is security for one of the loans, with a balance of $130,000. The other liabilities are unsecured. The following transactions occur:
• Inventories with a book value of $60,000 were sold for $40,000.
• The plant and equipment was sold for $200,000. The loan secured by the plant and equipment was paid.
• Wages and administrative expenses of $10,000 were accrued.
• An initial payment of 40 cents per dollar of indebtedness was paid to the unsecured creditors.

-On the receiver's statement of estate deficit, the change in estate deficit is:

A) $(70,000)
B) $(10,000)
C) $(60,000)
D) $(80,000)

Question 52

Assets carried at $100,000 were reported by a bankrupt company at the beginning of a period. During the period, assets carried at $60,000 were sold for $45,000, and other assets carried at $10,000 were determined to be worthless. A statement of realization and liquidation reports "assets not realized" of:

A) $25,000
B) $30,000
C) $45,000
D) $55,000

Question 53

Liabilities of $150,000 existed at the beginning of a period. During the period, liabilities recorded at $50,000 were settled for $35,000, and new liabilities of $5,000 were incurred. A statement of realization and liquidation reports "liabilities not liquidated" of:

A) $100,000
B) $125,000
C) $115,000
D) $105,000

Question 54

Liabilities of $200,000 were settled in full for $125,000. The $75,000 difference is reported on the statement of realization and liquidation as:

A) Liabilities to be liquidated
B) Liabilities not liquidated
C) A gain
D) A loss

Question 55

A statement of realization shows assets to be realized of $500,000, assets not realized of $300,000, and a loss on realization of $40,000. The amount reported for assets realized is:

A) $160,000
B) $240,000
C) $200,000
D) $460,000

Question 56

Which one of the following is not a liability subject to compromise in a reorganization?

A) A liability for supplies purchased after the Chapter 11 filing.
B) A liability incurred after the Chapter 11 filing for premature termination of a lease existing prior to filing.
C) Notes payable existing prior to the Chapter 11 filing.
D) A bank loan of $500,000 existing prior to the Chapter 11 filing, and secured by property valued at $350,000.

Question 57

During reorganization, a company should report liabilities subject to compromise on the balance sheet:

A) Under a separate caption, at book value, without current/noncurrent classification
B) Under a separate caption, at expected settlement amounts, without current/noncurrent classification
C) Under a separate caption, at book value, in current and noncurrent classifications
D) Under a separate caption, at expected settlement amounts, in current and noncurrent classifications

Question 58

During reorganization, prepetition liabilities that are fully secured are reported:

A) At book value, without current/noncurrent classification
B) At expected settlement amounts, without current/noncurrent classification
C) At book value, in current and noncurrent classifications
D) As offsets to the assets that secure the liabilities

Question 59

A firm is undergoing reorganization. Reorganization items on the income statement are likely to include all the following except:

A) Gains on settlement of postpetition liabilities.
B) Gains and losses resulting from adjusting existing book values of liabilities to the amounts likely to be allowed.
C) Interest income on investment of excess cash.
D) Penalties from cancelation of purchase contracts.

Question 60

In emerging from reorganization under Chapter 11 of the bankruptcy laws, a company is expected to have total future cash flows from its restructured operations of $6,000,000 (discounted present value = $2,500,000). In addition, excess assets, not needed for future operations, have a carrying value of $400,000 and are expected to be sold for $250,000. The company's reorganization value is:

A) $6,000,000
B) $6,250,000
C) $2,750,000
D) $2,900,000

Question 61

In a Chapter 11 reorganization, reorganization value is:

A) Book value of assets to remain plus fair value of assets to be sold
B) Fair value of assets to remain and fair value of assets to be sold
C) Fair value of assets to remain
D) Fair value of assets to be sold

Question 62

A company is emerging from reorganization under Chapter 11 of the bankruptcy laws. It has allowed prepetition liabilities of $3,000,000, postpetition liabilities of $400,000, and new equity interests valued at $100,000. For fresh start reporting to apply, the reorganization value of the company's assets must be:

A) Less than $3,400,000
B) Less than $3,500,000
C) Between $3,000,000 and $3,500,000
D) More than $3,400,000

Question 63

In emerging from reorganization under Chapter 11 of the bankruptcy laws, a company issues new voting shares to creditors and prior shareholders. To qualify for fresh start reporting:

A) Creditors must receive at least 75% of the new shares
B) Creditors must receive at least 90% of the new shares
C) Existing shareholders must receive less than 25% of the new shares
D) Existing shareholders must receive less than 50% of the new shares

Question 64

Use the following information to answer Questions
A company emerging from Chapter 11 reorganization has the following balance sheet:
$$\begin{array} { | l | r | l | r | } \hline \text { Current assets } & \$ 150,000 & \text { Postpetition liabilities } & \$ 100,000 \\\hline \text { Noncurrent assets } & 900,000 & \text { Liabilities subject to compromise } & 1,000,000 \\\hline & & \text { Common tock } & 200,000 \\\hline & & \text { Retained deficit } & \{\$ 250,000 \} \\\hline \text { Total } & \$ 1,050,000 & \text { Total } & \$ 1,050,000 \\\hline\end{array}$$ The plan of reorganization provides for the following:
• Estimated reorganization value is $750,000.
• Liabilities subject to compromise are replaced with $500,000 in notes payable and 60% of the new common stock issue.
• Existing shareholders receive 40% of the new stock issue.
• Noncurrent assets are written down by $300,000.

-The entry to record settlement of liabilities subject to compromise results in a gain on discharge of debt of:

A) $500,000
B) $490,000
C) $410,000
D) $390,000

Question 65

Use the following information to answer Questions
A company emerging from Chapter 11 reorganization has the following balance sheet:
$$\begin{array} { | l | r | l | r | } \hline \text { Current assets } & \$ 150,000 & \text { Postpetition liabilities } & \$ 100,000 \\\hline \text { Noncurrent assets } & 900,000 & \text { Liabilities subject to compromise } & 1,000,000 \\\hline & & \text { Common tock } & 200,000 \\\hline & & \text { Retained deficit } & \{\$ 250,000 \} \\\hline \text { Total } & \$ 1,050,000 & \text { Total } & \$ 1,050,000 \\\hline\end{array}$$ The plan of reorganization provides for the following:
• Estimated reorganization value is $750,000.
• Liabilities subject to compromise are replaced with $500,000 in notes payable and 60% of the new common stock issue.
• Existing shareholders receive 40% of the new stock issue.
• Noncurrent assets are written down by $300,000.

-The entry to record restructuring of the interests of prior shareholders results in a credit to additional paid-in capital of:

A) $110,000
B) $100,000
C) $200,000
D) $140,000

Question 66

Use the following information to answer bellow Questions
A company emerging from Chapter 11 reorganization has the following balance sheet:
$$\begin{array} { | l | r | l | r | } \hline \text { Cash } & \$ 25,000 & \text { Postpetition liabilities } & \$ 200,000 \\\hline \text { Account s receivable } & 60,000 & \text { Liabilities subject to compromise } & 1,500,000 \\\hline \text { Inventories } & 400,000 & \text { Common stock } & 300,000 \\\hline \text { Plant and equipment, net } & \underline { 1,200,000 } & \text { Retained deficit } & \underline { \{ 315,000 \ } \\\hline \text { Total } & \$ \underline { \$ 1,685,000 } & \text { Total } & \$ 1,685,000 \\\hline\end{array}$$ The plan of reorganization provides for the following:
• Estimated reorganization value is $1,300,000.
• Liabilities subject to compromise are replaced with $1,000,000 in notes payable and 80% of the new common stock issue.
• Existing shareholders receive 20% of the new stock issue
• Inventories and plant and equipment are written down to their fair values of $250,000 and $800,000, respectively.
• There are no previously unreported identifiable intangible assets.

-On the balance sheet immediately following emergence from reorganization, the common stock balance is:

A) $100,000
B) $200,000
C) $300,000
D) $350,000

Question 67

Use the following information to answer bellow Questions
A company emerging from Chapter 11 reorganization has the following balance sheet:
$$\begin{array} { | l | r | l | r | } \hline \text { Cash } & \$ 25,000 & \text { Postpetition liabilities } & \$ 200,000 \\\hline \text { Account s receivable } & 60,000 & \text { Liabilities subject to compromise } & 1,500,000 \\\hline \text { Inventories } & 400,000 & \text { Common stock } & 300,000 \\\hline \text { Plant and equipment, net } & \underline { 1,200,000 } & \text { Retained deficit } & \underline { \{ 315,000 \ } \\\hline \text { Total } & \$ \underline { \$ 1,685,000 } & \text { Total } & \$ 1,685,000 \\\hline\end{array}$$ The plan of reorganization provides for the following:
• Estimated reorganization value is $1,300,000.
• Liabilities subject to compromise are replaced with $1,000,000 in notes payable and 80% of the new common stock issue.
• Existing shareholders receive 20% of the new stock issue
• Inventories and plant and equipment are written down to their fair values of $250,000 and $800,000, respectively.
• There are no previously unreported identifiable intangible assets.

-On the balance sheet immediately following emergence from reorganization, goodwill is:

A) $0
B) $190,000
C) $165,000
D) $185,000

Question 68

Use the following information to answer bellow Questions
A company emerging from Chapter 11 reorganization has the following balance sheet:
$$\begin{array} { | l | r | l | r | } \hline \text { Cash } & \$ 25,000 & \text { Postpetition liabilities } & \$ 200,000 \\\hline \text { Account s receivable } & 60,000 & \text { Liabilities subject to compromise } & 1,500,000 \\\hline \text { Inventories } & 400,000 & \text { Common stock } & 300,000 \\\hline \text { Plant and equipment, net } & \underline { 1,200,000 } & \text { Retained deficit } & \underline { \{ 315,000 \ } \\\hline \text { Total } & \$ \underline { \$ 1,685,000 } & \text { Total } & \$ 1,685,000 \\\hline\end{array}$$ The plan of reorganization provides for the following:
• Estimated reorganization value is $1,300,000.
• Liabilities subject to compromise are replaced with $1,000,000 in notes payable and 80% of the new common stock issue.
• Existing shareholders receive 20% of the new stock issue
• Inventories and plant and equipment are written down to their fair values of $250,000 and $800,000, respectively.
• There are no previously unreported identifiable intangible assets.

-The entry to record settlement of liabilities subject to compromise results in a gain on discharge of debt of:

A) $400,000
B) $420,000
C) $500,000
D) $550,000

Question 69

Use the following information to answer bellow Questions
A company emerging from Chapter 11 reorganization has the following balance sheet:
$$\begin{array} { | l | r | l | r | } \hline \text { Cash } & \$ 25,000 & \text { Postpetition liabilities } & \$ 200,000 \\\hline \text { Account s receivable } & 60,000 & \text { Liabilities subject to compromise } & 1,500,000 \\\hline \text { Inventories } & 400,000 & \text { Common stock } & 300,000 \\\hline \text { Plant and equipment, net } & \underline { 1,200,000 } & \text { Retained deficit } & \underline { \{ 315,000 \ } \\\hline \text { Total } & \$ \underline { \$ 1,685,000 } & \text { Total } & \$ 1,685,000 \\\hline\end{array}$$ The plan of reorganization provides for the following:
• Estimated reorganization value is $1,300,000.
• Liabilities subject to compromise are replaced with $1,000,000 in notes payable and 80% of the new common stock issue.
• Existing shareholders receive 20% of the new stock issue
• Inventories and plant and equipment are written down to their fair values of $250,000 and $800,000, respectively.
• There are no previously unreported identifiable intangible assets.

-The entry to record restructuring of the interests of prior shareholders results in a credit to additional paid-in capital of:

A) $300,000
B) $200,000
C) $220,000
D) $280,000

Question 70

Use the following information to answer bellow Questions
A company emerging from Chapter 11 reorganization has the following balance sheet:
$$\begin{array} { | l | r | l | r | } \hline \text { Cash } & \$ 25,000 & \text { Postpetition liabilities } & \$ 200,000 \\\hline \text { Account s receivable } & 60,000 & \text { Liabilities subject to compromise } & 1,500,000 \\\hline \text { Inventories } & 400,000 & \text { Common stock } & 300,000 \\\hline \text { Plant and equipment, net } & \underline { 1,200,000 } & \text { Retained deficit } & \underline { \{ 315,000 \ } \\\hline \text { Total } & \$ \underline { \$ 1,685,000 } & \text { Total } & \$ 1,685,000 \\\hline\end{array}$$ The plan of reorganization provides for the following:
• Estimated reorganization value is $1,300,000.
• Liabilities subject to compromise are replaced with $1,000,000 in notes payable and 80% of the new common stock issue.
• Existing shareholders receive 20% of the new stock issue
• Inventories and plant and equipment are written down to their fair values of $250,000 and $800,000, respectively.
• There are no previously unreported identifiable intangible assets.

-In the entry to record revaluation of assets, the loss on asset revaluation is:

A) $ 550,000
B) $ 385,000
C) $1,050,000
D) $ 875,000

Question 71

A company has 1,000 outstanding common shares with a $5/share par value, additional paid-in capital of $5,000, and a deficit of $6,500 in retained earnings. It reduces its assets by $2,000 to report them at fair value. To achieve a successful quasi-reorganization, the company must reduce the par value of its common shares by:

A) $2.00 per share
B) $3.50 per share
C) $3.00 per share
D) $2.50 per share

Question 72

Use the following information for bellow Questions
Hopeful Company's balance sheet is as follows:
$\begin{array}{|c|}\hline \text {Hopeful Company}\\\text {Balance Sheet, pre-quasi-reorganization}\\\begin{array} { l | r | l | r } \hline \text { Assets } & & \text { Liabilities and Equity } & \\\hline \text { Cash } & \$ 60,000 & \text { Loans payable } & \$ 1,220,000 \\\hline \text { Inyentories } & 550,000 & \text { Common stock, } \$ 10 \text { par } & 550,000 \\\hline \text { Property \{net\} } & 950,000 & \text { Additional paid-in capital } & 400,000 \\\hline & & \text { Retained earnings } & \{ 610,000 \} \\\hline \text { Total } & \$ 1,560,000 & \text { Total } & \$ 1,560,000 \\\hline\end{array}\end{array}$ The company enters into a quasi-reorganization. Pursuant to this plan, inventories are written down by $50,000 and property is reduced by $180,000. The par value of the common stock is reduced to $2/share.

-After the quasi-reorganization, total assets are reported at:

A) $1,560,000
B) $1,790,000
C) $1,330,000
D) $1,270,000

Question 73

Use the following information for bellow Questions
Hopeful Company's balance sheet is as follows:
$\begin{array}{|c|}\hline \text {Hopeful Company}\\\text {Balance Sheet, pre-quasi-reorganization}\\\begin{array} { l | r | l | r } \hline \text { Assets } & & \text { Liabilities and Equity } & \\\hline \text { Cash } & \$ 60,000 & \text { Loans payable } & \$ 1,220,000 \\\hline \text { Inyentories } & 550,000 & \text { Common stock, } \$ 10 \text { par } & 550,000 \\\hline \text { Property \{net\} } & 950,000 & \text { Additional paid-in capital } & 400,000 \\\hline & & \text { Retained earnings } & \{ 610,000 \} \\\hline \text { Total } & \$ 1,560,000 & \text { Total } & \$ 1,560,000 \\\hline\end{array}\end{array}$ The company enters into a quasi-reorganization. Pursuant to this plan, inventories are written down by $50,000 and property is reduced by $180,000. The par value of the common stock is reduced to $2/share.

-At the completion of the quasi-reorganization process, the balance in additional paid-in capital is:

A) $230,000
B) $0
C) $400,000
D) $ 55,000

Question 74

Use the following information for bellow Questions
Hopeful Company's balance sheet is as follows:
$\begin{array}{|c|}\hline \text {Hopeful Company}\\\text {Balance Sheet, pre-quasi-reorganization}\\\begin{array} { l | r | l | r } \hline \text { Assets } & & \text { Liabilities and Equity } & \\\hline \text { Cash } & \$ 60,000 & \text { Loans payable } & \$ 1,220,000 \\\hline \text { Inyentories } & 550,000 & \text { Common stock, } \$ 10 \text { par } & 550,000 \\\hline \text { Property \{net\} } & 950,000 & \text { Additional paid-in capital } & 400,000 \\\hline & & \text { Retained earnings } & \{ 610,000 \} \\\hline \text { Total } & \$ 1,560,000 & \text { Total } & \$ 1,560,000 \\\hline\end{array}\end{array}$ The company enters into a quasi-reorganization. Pursuant to this plan, inventories are written down by $50,000 and property is reduced by $180,000. The par value of the common stock is reduced to $2/share.

-At the completion of the quasi-reorganization process, the balance in the common stock, $2 par account is:

A) $550,000
B) $440,000
C) $ 55,000
D) $110,000

Question 75

Use the following information for bellow Questions
Hopeful Company's balance sheet is as follows:
$\begin{array}{|c|}\hline \text {Hopeful Company}\\\text {Balance Sheet, pre-quasi-reorganization}\\\begin{array} { l | r | l | r } \hline \text { Assets } & & \text { Liabilities and Equity } & \\\hline \text { Cash } & \$ 60,000 & \text { Loans payable } & \$ 1,220,000 \\\hline \text { Inyentories } & 550,000 & \text { Common stock, } \$ 10 \text { par } & 550,000 \\\hline \text { Property \{net\} } & 950,000 & \text { Additional paid-in capital } & 400,000 \\\hline & & \text { Retained earnings } & \{ 610,000 \} \\\hline \text { Total } & \$ 1,560,000 & \text { Total } & \$ 1,560,000 \\\hline\end{array}\end{array}$ The company enters into a quasi-reorganization. Pursuant to this plan, inventories are written down by $50,000 and property is reduced by $180,000. The par value of the common stock is reduced to $2/share.

-The balance in the retained earnings account following the quasi-reorganization is:

A) $0
B) $(610,000)
C) $(840,000)
D) $(230,000)

Question 76

In a troubled debt restructuring, assets with a book value of $200,000 and a fair value of $180,000 are transferred in full settlement of a $250,000 debt. How is this reported?

A) Gain on restructuring, $70,000
B) Gain on restructuring, $50,000
C) Loss on asset disposition, $20,000; Gain on restructuring, $90,000
D) Loss on asset disposition, $20,000; Gain on restructuring, $70,000

Question 77

A company owes the bank $1,020,000. Since the company cannot pay this debt, the bank agrees to allow the company to pay $950,000 in two years, plus interest annually at $48,000 per year. What is the gain on restructuring?

A) $0
B) $50,000
C) $70,000
D) $26,000

Question 78

A company owes the bank $550,000. Since the company cannot pay this debt, the bank agrees to allow the company to pay $400,000 in two years, plus interest of $30,000 per year. What is the gain on restructuring?

A) $150,000
B) $120,000
C) $ 90,000
D) $ 60,000

Question 79

Use the following information to answer bellow Questions
At the beginning of 2020, a company borrowed $188,610, with payment of $100,000 to be made at the end of each of the years 2020 and 2021. The loan carries an interest rate of 4%. The company makes the $100,000 payment at the end of 2020 but is experiencing financial difficulties and renegotiates the terms of the loan. The creditor grants a concession by changing the payment due at the end of 2021 to $98,076, which changes the effective loan rate to 2%. No gain on restructuring is reported.

-The company reports interest expense in 2020 in the amount of:

A) $8,000.
B) $3,772.
C) $4,000.
D) $7,544.

Question 80

Use the following information to answer bellow Questions
At the beginning of 2020, a company borrowed $188,610, with payment of $100,000 to be made at the end of each of the years 2020 and 2021. The loan carries an interest rate of 4%. The company makes the $100,000 payment at the end of 2020 but is experiencing financial difficulties and renegotiates the terms of the loan. The creditor grants a concession by changing the payment due at the end of 2021 to $98,076, which changes the effective loan rate to 2%. No gain on restructuring is reported.

-The company reports interest expense in 2021 in the amount of:

A) $3,772.
B) $1,923.
C) $1,772.
D) $2,000.