Deck 14: Bankruptcy: Liquidation and Reorganization

Question 1

Creditors having security interests collateralized by specific assets of a debtor in bankruptcy liquidation are entitled to obtain satisfaction of their claims from the free assets of the debtor's estate.

Answer 1

False

Question 2

Unsecured creditors whose claims are to be paid in full from the assets of a debtor in bankruptcy liquidation before any cash is paid to other unsecured creditors are classified as unsecured creditors having preference.

Answer 2

False

Question 3

Assets in a statement of affairs (financial statement) are assigned to one of three categories: assets pledged for fully secured liabilities, assets pledged for partially secured liabilities, and priority assets.

Answer 3

False

Question 4

Insolvency in the bankruptcy sense is a financial status in which the aggregate current fair value of the assets of a business enterprise is not sufficient to pay the enterprise's liabilities.

Question 5

The filing of a debtor's petition in bankruptcy does not operate as an order for relief by the bankruptcy court.

Question 6

Creditors having priority under the Bankruptcy Code include creditors having security interests collateralized by specific assets of the debtor.

Question 7

In the accountability technique of accounting used by a trustee for a debtor in bankruptcy liquidation, there is no ledger account for owners' equity.

Question 8

A railroad corporation may not file a debtor's petition for bankruptcy.

Question 9

A debtor in bankruptcy liquidation will not be discharged within six years of a previous bankruptcy discharge.

Question 10

Owners' equity amounts are not displayed in a statement of affairs (financial statement).

Question 11

The bankruptcy court has the option of appointing either a trustee or an examiner in a bankruptcy reorganization.

Question 12

All stockholders of a corporation undergoing Chapter 11 bankruptcy reorganization must approve the plan of reorganization before it is confirmed by the bankruptcy court.

Question 13

A debtor filing a debtor's bankruptcy petition will not be discharged if the debtor had received a prior discharge in bankruptcy within the past:

A) Two years
B) Four years
C) Six years
D) Eight years

Question 14

Typically, the estimated amount available for short-term prepayments in a statement of affairs (financial statement) is:

A) Zero
B) Carrying amount
C) Current fair value
D) Net realizable value

Question 15

After a corporation has been reorganized under Chapter 11 of the Bankruptcy Code, any loss that originated prior to the date of the reorganization is debited to:

A) Retained Earnings
B) Pre-Reorganization Loss
C) Prior Period Adjustment
D) None of the foregoing ledger accounts

Question 16

William Bautista is starting a new business, Bautista Enterprises, which will be a single proprietorship selling retail novelties. Bautista recently received a discharge in bankruptcy, but certain proved claims were unpaid because of insufficient funds. Which of the following is still a claim against Bautista?

A) The unpaid amounts owed to secured creditors who received less than the full amount after resorting to their security interest and receiving their bankruptcy cash payments
B) The unpaid amounts owed to trade creditors for merchandise purchased and sold by Bautista in the ordinary course of his prior business enterprise
C) A personal loan to Bautista by his father made in an attempt to avoid bankruptcy
D) The unpaid amount of income taxes payable to the United States that became due within three years preceding Bautista's bankruptcy

Question 17

One goal of the reorganization of a business enterprise under Chapter 11 of the Bankruptcy Code is to:

A) Liquidate the enterprise immediately
B) Revalue the enterprise's assets at current fair value
C) Continue the enterprise as a going concern
D) Place the enterprise under the jurisdiction of the Securities and Exchange Commission

Question 18

The following items were displayed in the statement of affairs for Lubbock Company: Based on the foregoing information, what percentage of their claims should unsecured, nonpriority creditors expect to receive on the liquidation of Lubbock Company under Chapter 7 of the Bankruptcy Code?

A) 85%
B) 90%
C) 86.5%
D) 100%
E) Some other percentage

Question 19

Which of the following is most closely related to a bankruptcy reorganization?

A) Computation of estimated deficiency to unsecured, nonpriority creditors
B) Preparation of a statement of realization and liquidation
C) Approval by two-thirds of stockholders and elimination of accumulated deficit from the debtor's accounting records
D) Opening a Cash with Escrow Agent ledger account in the accounting records of the trustee

Question 20

A creditors' petition for involuntary bankruptcy liquidation must allege either that a custodian was appointed for or had taken possession of the debtor's property, or that the debtor:

A) Had committed an act of bankruptcy
B) Was not paying debts as they came due
C) Was insolvent
D) Had committed fraud

Question 21

What type of ledger account is the Estate Deficit account used in the trustee's accounting records for a debtor in bankruptcy liquidation?

A) Asset
B) Liability
C) Equity
D) Revenue
E) None of the foregoing

Question 22

Which of the following is first-ranked of the unsecured liabilities with priority in a bankruptcy liquidation?

A) Claims of governmental entities for various taxes or duties
B) Administrative costs
C) Claims for wages, salaries, and commissions, subject to limitations of amount and time
D) None of the foregoing

Question 23

The accounting equation for a trustee in a bankruptcy liquidation is:

A) Assets equal liabilities plus owners' equity
B) Assets equal accountability
C) Assets equal liabilities minus estate deficit
D) Assets minus liabilities equals accountability

Question 24

Nimbus Company has incurred large net losses for the past two years. Because of its inability to pay current liabilities, Nimbus has filed a petition for reorganization under Chapter 11 of the Bankruptcy Code. The reorganization provisions of the Bankruptcy Code:

A) Require that the bankruptcy court appoint a trustee in all cases
B) Permit Nimbus management to remain in possession of its assets
C) Apply only to creditors' bankruptcy petitions
D) Will apply to Nimbus only if Nimbus is required to register with the Securities and Exchange Commission pursuant to the federal securities laws

Question 25

In the journal entry to open the accounting records of a trustee in a Chapter 7 bankruptcy liquidation, the debit to the Estate Deficit ledger account is in the statement of affairs amount of the:

A) Estimated deficiency to unsecured, nonpriority creditors
B) Total estimated amount available
C) Estimated amount available for unsecured, nonpriority creditors
D) Stockholders' equity of the debtor corporation

Question 26

Under the Bankruptcy Code, do creditors having priority include:

A)
B)
C)
D)

Question 27

Among the December, 2006, transactions of Wilma Ross, trustee in bankruptcy for Davis Company, which is in liquidation under Chapter 7 of the Bankruptcy Code, were the following:
Prepare journal entries for the foregoing transactions of Wilma Ross, Trustee in Bankruptcy for Davis Company. Omit explanations.

Question 28

Among the provisions of the plan of reorganization confirmed by the bankruptcy court for Weibel Company were the following:
a. Amend articles of incorporation to authorize 10,000 shares of 12%, $1 par preferred stock and 15,000 shares of new $2 par common stock. 10,000 shares of the new common stock were to be exchanged on a share-for-share basis for all 10,000 shares of the $100 par common stock currently outstanding.
b. Exchange 5,000 shares of the $1 par, 12% preferred stock (at a current fair value of $10 a share) to creditors for trade accounts payable totaling $52,000.
c. Pay 80 cents on the dollar for trade accounts payable totaling $62,700.
Prepare journal entries for Weibel Company to record the completion of the foregoing provisions of the Chapter 11 bankruptcy reorganization. Omit explanations.

Question 29

Items displayed in the June 30, 2006, statement of affairs for Liquidating Company, which is undergoing bankruptcy liquidation, included the following:

Complete the following analysis:

Question 30

During the period that a trustee in a Chapter 7 bankruptcy liquidation carries on the operations of the debtor's business, the accounting records of the debtor are used by the trustee. However, once the trustee begins realization of the debtor's assets, a separate set of accounting records is established for the trustee.
If a trustee is appointed in a Chapter 11 bankruptcy reorganization, should the trustee use the debtor's accounting records during the period of the reorganization or establish a separate set of accounting records? Explain.