Deck 21: Debt Restructuring, Corporate Reorganizations, and Liquidations

Question 1

A debtor in a chapter 7 bankruptcy must files a statement of affairs consisting of answers to a series of stated questions about the identity of the debtor's records and books, transactions, and events affecting the financial conditions of the debtor.​

Answer 1

True

Question 2

In a quasi-reorganization, which of the following may occur?

A)​Excess plant capacity may be sold
B)​Assets may be revalued to reflect impaired values
C)​Retained Earnings deficits are eliminated by changes made to the capital structure
D)​All of the above may occur

Answer 2

D

Question 3

In a troubled debt restructuring where the debtor elects to transfer an equity interest to a creditor in exchange for the satisfaction of an outstanding debt:

A)​the debtor may recognize a gain on restructure when the market value of the equity interest is greater than the book value of the debt plus any accrued interest
B)​the debtor may recognize a gain on restructure when the market value of the equity interest is less than the book value of the debt plus any accrued interest
C)​any difference between market value of equity interest and book value of the debt plus accrued interest must be recorded in Retained Earnings.
D)​any difference between market value of equity interest and book value of the debt plus accrued interest must be recorded in Additional Paid in Capital in Excess of Par.

Answer 3

B

Question 4

In the accounting statement of affairs, the book value of the assets should be greater than the assets' estimated realizable value plus the estimated gain on liquidation.​

Question 5

Equipment with a fair value of $65,000 and a cost basis of $60,000 is transferred to a creditor in partial settlement of a debt of $150,000 plus accrued interest of $7,500.The balance of the debt will be satisfied by 3 equal payments of $30,000 over the next three years.Which of the following journal entries best records the restructure?
a.
$\begin{array}{lrr}\text { Loan Payable } & 150,000 & \\\text { Interest Payable } & 7,500 & \\\text { Equipment } & & 60,000 \\\text { Restructured Debt } & & 90,000 \\\text { Gain on Restructure } && 7,500\end{array}$

b.
$\begin{array}{lrr}\text { Loan Payable } & 150,000 & \\\text { Loss on Restructure } & 5,000 & \\\text { Equipment } & & 60,000 \\\text { Gain on Transfer of Equipment } && 5,000 \\\text { Restructured Debt } && 90,000\end{array}$

c.
$\begin{array}{lrr}\text { Loan Payable } & 150,000 & \\\text { Interest Payable } & 7,500 & \\\quad \text { Equipment } & & 60,000 \\\text { Gain on Transfer of Equipment } && 5,000 \\\text { Restructured Debt } && 90,000 \\\text { Gain on Restructure } && 2.500\end{array}$

d.
$\begin{array}{lrr}\text { Loan Payable } & 150,000 & \\\text { Interest Payable } & 7,500 & \\\quad \text { Equipment } & & 65,000\end{array}$

Question 6

After eliminating the deficit in a reorganization plan, a balance may remain in Reorganization Capital.On the balance sheet, where would this account appear?

A)​part of the Paid-In Capital
B)​part of the dated balance in Retained Earnings
C)​an Intangible Asset if the balance is a debit
D)​a deferred credit amortized over a period not to exceed 40 years

Question 7

Which of the following is an illustration of an action that can be taken to help a troubled firm without using the court system?

A)​asset transfers to settle debt
B)​equity interest granted in exchange for debt
C)​modifications of interest rates more favorable to the firm
D)​All or a combination can be used.

Question 8

In a quasi-reorganization, a debit balance in Retained Earnings (a deficit) is eliminated by

A)​reducing paid-in capital or reorganization capital.
B)​reducing future depreciation charges.
C)​issuing more capital stock.
D)​writing down assets to lower, but fair, values.

Question 9

In the accounting statement of affairs, the book value of the assets should equal the assets' estimated realizable value plus (minus) the estimated loss (gain) on liquidation.​

Question 10

The Accounting Statement of Affairs is a report on the activities of the trustee made periodically to the bankruptcy court.​

Question 11

The Statement of Realization and Liquidation reports estimated realizable values rather than actual liquidation results.​

Question 12

Under fresh start accounting, there will be no beginning retained earnings, assets are valued at fair value, liabilities are recorded at their present values and goodwill may be recorded.​

Question 13

The statement of legal affairs reports the actual liquidation results in a case of bankruptcy.​

Question 14

The dividend to general unsecured creditors is not a return of equity to shareholders, but the ratio of the net proceeds available to unsecured creditors without priority divided by the total claims of unsecured creditors without priority.​

Question 15

Land and buildings having a book value of $150,000 and a fair value of $185,000 are transferred to a creditor in a troubled debt restructuring to fully settle a loan of $200,000 plus accrued interest of $3,000.What is the amount of the gain on restructuring?

A)​$35,000
B)​$53,000
C)​$15,000
D)​$18,000

Question 16

The Statement of Realization and Liquidation reports the actual liquidation results.It is a report on the activities of the trustee made periodically to the bankruptcy court.​

Question 17

In a troubled debt restructuring involving only the modification of terms of a loan receivable, how should the loan receivable be measured on the creditor's balance sheet?

A)​The loan's observable market price.
B)​The fair value of the collateral if the loan is collateral dependent.
C)​The present value of expected future cash flows at the original contractual rate.
D)​All of the above.

Question 18

On January 1, 2015, Duke Company negotiated an agreement to modify the terms of a $500,000 note with $38,000 of accrued interest.Payments of $35,000 including interest will be made each quarter end up to and including June 30, 2019.Which of the following is true about this troubled debt restructuring?

A)​Interest expense will be recognized as it is incurred.
B)​A gain of $88,000 will be recognized.
C)​The present value of the payments must be calculated to determine if there is a gain or loss.
D)​None of the above is true.

Question 19

The primary purpose of the Statement of Affairs is to approximate the estimated amount available to each class of claims.

Question 20

On January 1, 2012, Duke Company negotiated an agreement to modify the terms of a $500,000 note with $38,000 of accrued interest.Payments of $25,000 cash will be made each quarter end up to and including June 30, 2016.Which of the following is true about this troubled debt restructuring?

A)​The $25,000 payments will include principal and interest.
B)​A gain of $88,000 will be recognized.
C)​The present value of the payments must be calculated to determine if there is a gain or loss.
D)​None of the above is true.

Question 21

Which of the following is not a general objective of bankruptcy procedures?

A)​assurance that all obligations of the debtor will be satisfied completely
B)​attempt to give the debtor a fresh start
C)​assurance of an equitable distribution of the debtor's property among creditors
D)​None of the above is a general objective.

Question 22

Equipment with a book values of $120,000 is sold in a liquidation process for cash of $110,000.This equipment was security for a $150,000 bank loan.Any remainder is consider unsecured without priority.How would this transaction be reported on the Statement of Realization and Liquidation?

A)​A reduction in noncash assets of $120,000
B)​A loss reported to owner's equity of $10,000
C)​A disbursement of cash to the bank of $110,000, a reduction in partially secured liability of $150,000, and an increase in unsecured without priority liability of $40,000
D)​all of the above would occur

Question 23

The ratio called "dividend to general unsecured creditors" is calculated by which of the following formulas?

A)​Estimated amount available for unsecured creditors with/without priority divided by Total claims of all unsecured creditors with/without priority
B)​Estimated realizable value of all debtor assets divided by Book value of debtor assets
C)​Estimated gain/loss on liquidation divided by Total estimated net realizable value of debtor assets
D)​Net estimated proceeds available to unsecured creditors without priority divided by Total claims of unsecured creditors without priority.

Question 24

Kentucky Blue, Inc., a lawn care service corporation, is in serious financial difficulty with a deficit of $2,100,000.The company's plant and equipment were designed for highly specialized products and activities.Therefore, they would yield only a small fraction of their book value upon sale.Creditors realize that they will receive little if the corporation is dissolved.In view of the renewed interest in professional lawn care, a plan of reorganization under Chapter 11 was adopted and received the necessary approvals.
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Required:
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Prepare journal entries to record the following stipulations of the plan:
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a.Replace the 14% first mortgage bonds with face value of $300,000, on which there is $13,000 of unamortized premium, with 10% interest bonds, with a face value of $250,000.To cover the accrued interest of $42,000 on the 14% bonds, bondholders will receive 20,000 shares of new $1 par common stock.​
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b.Unsecured accounts and notes payable total $200,000.Creditors have agreed to accept $0.55 on the dollar.​
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c.Replace the 10%, $100 par, cumulative participating preferred stock (of which 10,000 shares are outstanding, having a related paid-in capital in excess of par of $170,000) with an equal number of shares of 8%, $40 par, noncumulative nonparticipating preferred stock.The corporation will no longer be liable for the $100,000 of undeclared dividends in arrears on the 10% preferred stock.​
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d.Replace the 200,000 shares of $10 par common stock, having a discount of $80,000, with an equal number of $1 par common shares.​
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e.Eliminate the deficit.​
​

Question 25

Which of the following is not a duty of a trustee in a chapter 7 liquidation?

A)​File proofs of claim with the bankruptcy court.
B)​Investigate the financial affairs of the debtor.
C)​Make payments to creditors as promptly as practicable with regard for priorities.
D)​File reports of progress.

Question 26

Below is a list of unsecured items that may arise during a Chapter 7 liquidation.
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a.Wages up to $4,000 earned within 90 days before the filing.​
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b.Tax claims of a government unit.​
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c.Debts incurred after commencement of involuntary bankruptcy but before the order for relief.​
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d.Claims of general creditors not granted priority.​
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e.Deposits up to $1,800 each for goods or services never received from the debtor.f.Expenses to administer the estate.g.Unpaid contributions to employee benefit plans arising from service performed up to 180 days before filing, up to $4,000 per employee covered.​
​

Question 27

Which of the following statements is true?

A)​Certain debts are not dischargeable.
B)​The goal of liquidation is to give the company a new start.
C)​All secured claims are paid in full.
D)​The expenses to administer the estate are paid last because they are unsecured.

Question 28

Put the following classes in the order allowed by the Bankruptcy Act, starting with the highest priority to the lowest: ?
1) Expenses to administer estate
2) Tax claims of governmental units
3) Wages (including salaries and commissions) up to $\$ 10,000$ earned within 180 days
4) deposits up to $\$ 1,800$ each for goods or services never received from the debtor

A)-1,3,4,2
B)-3,1,2,4
C)-4,2,1,3
D)-2,1,3,4

Question 29

Rockee Corporation, a bio-tech firm, has found itself in financial difficulty and may file for bankruptcy.Rockee's Statement of Affairs reflects the following summary information:
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$$\begin{array} { l r } \text { Book value of assets } & \$ 700,000 \\\text { Net realizable value of assets } & 370,000 \\\text { Total liabilities } & 400,000 \\\text { Secured claims } & 250,000 \\\text { Unsecured claims with priority } & 30,000\end{array}$$ Required:
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Compute the following:
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a.The deficiency traceable to unsecured creditors with priority
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b.The dividend to general unsecured creditors without priority.?
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c.Rockee owes Flint Corporation $9,000 secured by inventory that is expected to realize $7,000.How much can Flint expect to receive on this claim?
?
?

Question 30

A plan of reorganization may include all except which of the following?

A)​arrangements involving elimination of some debt
B)​identification of various classes of claims
C)​identification of a trustee in liquidations
D)​differentiation of impaired versus non-impaired interests

Question 31

Lakeside Bank holds a $100,000 note secured by a building owned by Fly-By-Night Manufacturing, which has filed for bankruptcy under Chapter 7 of the Bankruptcy Code.If the property has a book value of $120,000 and a fair market value of $90,000, what is the best way to describe the note held by Second City Bank? The bank has a(n)

A)​secured claim of $100,000.
B)​unsecured claim of $100,000.
C)​secured claim of $90,000 and an unsecured claim of $10,000.
D)​secured claim of $100,000 and an unsecured claim of $20,000.

Question 32

A voluntary bankruptcy petition can be filed under

A)​Chapter 7.
B)​Chapter 11.
C)​Chapter 13.
D)​All of the above chapters.

Question 33

The document used to estimate amounts available to each class of claims is called a(n)

A)​Statement of Assets and Liabilities.
B)​Legal Statement of Affairs.
C)​Accounting Statement of Affairs.
D)​Statement of Realization and Liquidation.

Question 34

Following is the balance sheet of Tontoe Corporation on July 1, 20X5, just prior to obtaining the required stockholder approval to undergo a quasi-reorganization:
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Required:
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Prepare the journal entries necessary to record the following items that were part of the quasi-reorganization:
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a.Inventory is to be reduced to its fair market value of $90,000.?
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b.The plant and equipment is to be revalued to $70,000 through the Accumulated Depreciation account.?
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c.Par value of the stock is reduced to $1 per share and the deficit is eliminated.?

Question 35

Which of the following does not describe the accounting statement of affairs?

A)​the emphasis is on asset net realizable value, not historical cost
B)​the statement of affairs is concerned only with the assets of the debtor organization, not the claims
C)​the statement can also be used in a reorganization
D)​the statement of affairs is based on estimated values; actual realized values may be different

Question 36

Zenato's Corporation is a chain of sandwich shops that has recently had difficulty meeting its long-term debt requirements.In order to avoid court proceedings, the firm's creditors agreed to the following debt restructuring in December, 20X1:
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a.A $50,000 note would be fully satisfied with a single $40,000 payment on March 1, 20X2.The note had accrued interest of $2,000 on December 1, 20X1.?
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b.A $75,000 note with accrued interest of $3,000 will be fully satisfied with $35,000 payments on December 1, 20X2 and December 1, 20X3.The original interest rate on the note was 12%.?
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c.A $40,000 note with no accrued interest will be satisfied with payments of $23,048 on December 1, 20X2 and December 1, 20X3.The old note carried a 15% interest rate.The effective rate on the restructured note is 10%.?
Required:
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Prepare the journal entries to record the restructuring and payments of the notes.?

Question 37

Wayne Corporation, a manufacturer of farm machinery, had poor financial results last year because of a drought.Back orders indicate complete recovery this year.To eliminate a deficit that increased when the books were closed at the end of last year, the corporation has received stockholders' and state approval to conduct a quasi-reorganization on January 2.
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Required:
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Prepare journal entries as of January 2 to record the quasi-reorganization and the stockholders' equity section of its balance sheet immediately thereafter.The following data are pertinent:
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a.Inventory at year-end is shown at FIFO cost of $280,000.Inventory is to be valued at replacement cost of $250,000.?
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b.Property, plant, and equipment are shown in the records at $4,000,000, net of accumulated depreciation.They are to be written down to fair value of $3,100,000.?
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c.Stockholders' equity consists of:
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$\begin{array}{lr}\text {Common stock ( \(\$ 10\) par) 400,000 shares issued}\\\text { and outstanding } & \$ 4,000,000 \\\text { Additional paid-in capital } & 100,000\\\text { Retained earnings (deficit). } & \underline{(2,600,000)} \\\text { Total stockholders' equity } & \underline{\$ 1,500,000}\end{array}$

?
?
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Par value of stock is to be reduced from $10 to $1 per share.Paid-in capital related to the former stock is to be canceled.?
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d.The deficit is to be eliminated.?
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Question 38

A corporation's accounting statement of affairs shows a dividend of 115%.The dividend means that

A)​secured creditors will receive an amount in excess of the book value of their claims.
B)​unsecured creditors will receive an amount in excess of the book value of their claims.
C)​stockholders may expect some return on their interests.
D)​an error was made in the preparation of the statement.

Question 39

Hogan, Inc.is a telecommunications company.Currently, Hogan is experiencing difficulty in servicing its long-term debt.The corporation has obtained permission from its creditors to restructure outside of the court system with the following transactions:
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a.A piece of equipment that had cost Hogan $95,000 and had $19,000 of accumulated depreciation was transferred to a creditor in full settlement of a $45,000 note with $2,250 of accrued interest.?
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b.2,000 shares of $2 par value common stock were issued to a creditor in full payment of a $80,000 loan, plus accrued interest of $800.The stock was selling for $30 per share on the date of exchange.?
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c.A loan with a book value of $50,000 and accrued interest of $1,000 was restructured so that three annual installments of $12,000 will satisfy both the principal and interest in full.?
Required:
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Prepare the necessary journal entries to record these transactions in the journal of Hogan.?

Question 40

Which of the following is not true of a company operating as a "debtor-in-possession' after a chapter 11 reorganization plan is approved by the bankruptcy court?

A)​Provisions are binding on all creditors and security holders, whether or not they accepted the plan.
B)​Property is vested in the debtor company is free of all claims, except as stipulated under the plan.
C)​If the reorganization is not accomplishing its objective, a request for modification or conversion to a chapter 7 liquidation may be submitted to the court.
D)​If the plan contained the provision to pay accounts payable at $.50 on $1.00, and the company's cash flow is better than expected, the amount paid could be increased.

Question 41

As of June 30, 20X4, the Lillie Corporation has the following assets, liabilities, and owners' equity:
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$\begin{array}{lr}\text { Assets}&\text { Book Value}\\ \text { Cash } & \$ 10,000 \\\text { Marketable securities } & 30,000 \\\text { Accounts receivable (net) } & 40,000 \\\text { Inventories } & 100,000 \\\text { Land } & 50,000 \\\text { Buildings (net) } & 140,000 \\\text { Machinery (net) } & 105,000 \\\text { Goodwill } \quad \text { Total } & \underline{40,000} \\\quad \$ 515,000\end{array}$

$\begin{array}{lr}\text { Liabilities and Owners' Equity }&\text { Book Value}\\ \text { Accounts payable } & \$ 100,000 \\\text { Accrued income tax } & 10,000 \\\text { Accrued mortgage interest } & 20,000 \\\text { Accrued salaries expense } & 30,000 \\\text { Mortgage payable } & 200,000 \\\text { Common stock ( } \$ 10 \text { par) } & 200,000 \\\text { Additional Paid-in capital } & 201,000 \\\text { Deficit } & \underline{(246,000}) \\\quad \text { Total } & \$ 515,000\end{array}$ The following is provided:
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Marketable securities have a market value of $24,000.Accounts receivable are estimated to produce $30,000.The sale of inventories should yield $120,000, $20,000 of which must be assigned to a creditor (account payable) who is owed $24,000.The land and buildings can be sold for $222,000 with the buyer assuming the mortgage and its unpaid interest.The machinery will realize $50,000.All salaries qualify for priority.
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Required:
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Prepare a statement of affairs including the calculation of the dividend to the unsecured claims without priority.
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Question 42

On June 1, 20X5, the books of Dremer Corporation show assets with book values and realizable values as follows:
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$\begin{array}{lrr}& \text { Assets } & \\&&\text { Realizable } \\& \text { Book Value } & \text { Value } \\\text { Cash } & \$ 1,850 & \$ 1,850 \\\text { Accounts Receivable (net) } & 21,200 & 17,000 \\\text { Note Receivable } & 15,000 & 15,000 \\\text { Inventory } & 41,000 & 20,000 \\\text { Investment in Calandir Stock } & 5,800 & 15,000 \\\text { Land and Building (net) } & 98,500 & 92,800 \\\text { Equipment (net) } & 43,000 &8,000 \\\quad \text { Totals } & \$226,350& \$ 169,650\end{array}$

Dremer's books show the following liabilities:
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$\begin{array}{lr}\text { Liabilities }\\ &\text { Book Value }\\\text { Accounts payable }(50,000 \text { secured by inventory }\\\text { Accounts payable ( } 50,000 \text { secured by inventory } \\\text { and equipment) } & \$ 90,625 \\\text { Wages payable (eligible for priority) } & 3,775 \\\text { Other Accrued Liabilities } & 10,000 \\\text { Accrued interest on notes payable } & 375 \\\text { Accrued interest on mortgage payable } & 600 \\\text { Notes payable (secured by Investment in Calandir Stock) } & 10,000 \\\text { Mortgage payable (secured by land and buil ding) } & 70,000 \\\quad \text { Total } & \$ 185,375 \\\end{array}$

Using the following information, prepare a Statement of Realization and Liquidation for Dremer Inc.for the period of 6/1/X5 to 6/30/X5.
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No subsequent discoveries
Sale of Calandir Securities at a market value of $16,000
Collection of Note Receivable into cash $15,000
Sale of Equipment at $7,000
Sale of Inventory at $22,000
Partial Payment of Accounts Payable $29,000
Payment of Note Payable $10,375?

Question 43

Fresh-start accounting must be adopted by certain debtors emerging from chapter 11 bankruptcy.
1) When is fresh start accounting required?
2) What are some of the characteristics of fresh-start accounting?
​

Question 44

On June 1, 20X5, the books of Hallow Corporation show assets with book values and realizable values as follows:
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$\begin{array}{lrr}&\text { Assets }\\&&\text { Book Value }&\text { Realizable Value }\\\text { Cash } && \$ 10,000 & \$ 10,000 \\\text { Receivables (net) } && 100,000 & 50,000 \\\text { Inventory } & &140,000 & 100,000 \\\text { Land and building (net) } & &600,000 & 650,000 \\\text { Equipment (net) } && 400,000 & 100,000 \\\quad \text { Totals } && \$ 1,250,000 & \$ 910,000\end{array}$
Hallow's books show the following liabilities:
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$\begin{array}{lr}&\text { Liabilities }\\&&\text { Book Value }\\\text { Accounts payable } & &\$ 260,000 \\\text { Wages payable (eligible for priority) } && 10,000 \\\text { Taxes payable } && 20,000 \\\text { Accrued interest on notes payable } && 30,000 \\\text { Accrued interest on mortgage payable } & &20,000\\\text { Notes payable (secured by receivables and } & \\\text { inventory) } && 500,000 \\\text { Mortgage payable (secured by land and building) } && 300,000 \\\text { Total } && \$ 1,140,000 \\\end{array}$ Required:
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a.Prepare a schedule to determine the amount available for unsecured claims without priority.?
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b.Determine the dividend to unsecured claims without priority.?
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c.What amount are the note holders likely to receive? What is their dividend?
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Question 45

Differentiate by function the Accounting Statement of Affairs and the Statement of Realization and Liquidation.​

Question 46

On June 1, 20X5, the books of Dremer Corporation show assets with book values and realizable values as follows:
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$\begin{array}{lrr}& \text { Assets } & \\&&\text { Realizable } \\& \text { Book Value } & \text { Value } \\\text { Cash } & \$ 1,850 & \$ 1,850 \\\text { Accounts Receivable (net) } & 21,200 & 17,000 \\\text { Note Receivable } & 15,000 & 15,000 \\\text { Inventory } & 41,000 & 20,000 \\\text { Investment in Calandir Stock } & 5,800 & 15,000 \\\text { Land and Building (net) } & 98,500 & 92,800 \\\text { Equipment (net) } & 43,000 &8,000 \\\quad \text { Totals } & \$226,350& \$ 169,650\end{array}$
Dremer's books show the following liabilities:
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$\begin{array}{lr}\text { Liabilities }\\ &\text { Book Value }\\\text { Accounts payable }(50,000 \text { secured by inventory }\\\text { Accounts payable ( } 50,000 \text { secured by inventory } \\\text { and equipment) } & \$ 90,625 \\\text { Wages payable (eligible for priority) } & 3,775 \\\text { Other Accrued Liabilities } & 10,000 \\\text { Accrued interest on notes payable } & 375 \\\text { Accrued interest on mortgage payable } & 600 \\\text { Notes payable (secured by Investment in Calandir Stock) } & 10,000 \\\text { Mortgage payable (secured by land and buil ding) } & 70,000 \\\quad \text { Total } & \$ 185,375 \\\end{array}$
Prepare an accounting Statement of Affairs including the computation of the dividend to the unsecured creditors without priority.
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Question 47

Describe the duties of the trustee in a Chapter 7 liquidation.

Question 48

Mallory Corporation is being liquidated under Chapter 7 of the Bankruptcy Act.On May 1, 20X5, you are appointed the court's trustee for the liquidation.The book values for assets and liabilities, on May 1, 20X5, were as follows:
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$$\begin{array} { l r } \text { Cash } & \$ 4, 000 \\\text { Accounts receivable (net) } & 80,000 \\\text { Inventories } & 200,000 \\\text { Land and building (net) } & 340,000 \\\text { Machinery (net) } & 100,000 \\\text { Accounts payable } & 180,000 \\\text { Salaries payable (eligible for priority) } & 60,000 \\\text { Income tax payable } & 14,000 \\\text { Trustee's fee payable } & 20,000 \\\text { Mortgage payable } & 240,000 \\\text { Bank loan payable } & 90,000\end{array}$$ During May through July of 20X5, the following occurred:
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The mortgage is secured by the land and building and the bank loan is secured by the machinery.The accounts payable are secured by the inventories.
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Three-fourths of the accounts receivable were collected.Of the remaining accounts, $10,000 are believed to be uncollectible.
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The inventories were sold for $170,000.
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The land and building were sold for $20,000 and assumption of the mortgage.The machinery sold for $70,000 and the proceeds were remitted to the bank.
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Salaries payable and $170,000 of the accounts payable were paid.
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Required:
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Complete Figure 21-A: Statement of Realization and Liquidation for May, June, and July of 20X5.
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?
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Question 49

Describe the options that are available to a corporation that is unable to service its debts on a timely basis but that does NOT require court action.