Test bank advanced accounting 10e by beams chapter 17

To download more slides, ebook, solutions and test bank, visit

Chapter 17 Test Bank
CORPORATE LIQUIDATIONS, REORGANIZATIONS, AND DEBT
RESTRUCTURINGS FOR FINANCIALLY DISTRESSED CORPORATIONS
Multiple Choice Questions
LO1
1.

When the bankruptcy court grants an order for relief
a. creditors may not seek payment for their claims directly
from the debtor corporation.
b. the reorganization plan was accepted by creditors having at
least one-half of the total number of claims and the claims
represent at least two-thirds of the total amount owed.
c. the bankruptcy court confirms that the reorganization plan
is fair and equitable to creditors.
d. the court discharges the debtor except for those claims
provided for in the reorganization plan.

LO1
2.

Which of the following must approve a Chapter 11 plan?
a.
b.
c.
d.

LO1
3.

organization’s management.
assigned trustee.
entity’s stockholders.
court and the creditors.

When the accounting equation of a corporation computes a
negative ownership position, because liabilities are greater
than assets, the firm is
a.
b.
c.
d.

LO1
4.

The
The
The
The

a distressed corporation.
a bankrupt corporation.
insolvent in the equity sense.
insolvent in the bankruptcy sense.

A bankruptcy petition filed by a firm’s creditors is
a.
b.

c.
d.

a Chapter 7 petition.
a petition for liquidation.
an involuntary petition.
a voluntary petition.

©2009 Pearson Education, Inc. publishing as Prentice Hall
17-1


To download more slides, ebook, solutions and test bank, visit

LO1
5.

The duties of a debtor in possession in a Chapter 11 bankruptcy
case do not include
a. filing a list of creditors and schedules of assets and
liabilities with the bankruptcy court.
b. operating the business during the reorganization period.
c. filing a reorganization plan.
d. surrendering all property to the trustee.

LO1
6.

Liabilities incurred after entering Chapter 11
a. can only occur after secured creditors are paid.

b. must be approved by creditors’ committees in liquidation
cases.
c. must be approved by trustees.
d. must be preapproved by the bankruptcy court.

LO1
7.

In a troubled debt restructuring involving a modification of
terms, the debtor’s gain on restructuring
a.
b.
c.
d.

LO1
8.

will equal
will equal
may or may
may or may

the
the
not
not

creditor’s gain on restructuring.
creditor’s loss on restructuring.

equal the creditor’s gain on restructuring.
equal the creditor’s loss on restructuring.

A single creditor
a. can never file a petition for bankruptcy.
b. with a $10,000 or more secured claim may file a petition
for bankruptcy.
c. with a $10,000 or more unsecured claim may file a petition
for bankruptcy, if there are fewer than 12 unsecured
creditors.
d. with a $10,000 or more unsecured claim may file a petition
for bankruptcy if there are more than 12 unsecured
creditors.

LO1
9.

A case against a corporate debtor
a. can be filed only under Chapter 7.
b. can be filed only under Chapter 11.
c. * can be filed either under Chapter 7 or Chapter 11.
d. will be determined by the trustee whether is shall be
Chapter 7 or Chapter 11.

©2009 Pearson Education, Inc. publishing as Prentice Hall
17-2


To download more slides, ebook, solutions and test bank, visit

LO1
10.

A
primary
difference
between
bankruptcy petitions is that

voluntary

and

involuntary

a. creditors file the petition in an involuntary filing.
b. trustees are not used in an voluntary filing.
c. voluntary petitions are not subject to review by the
bankruptcy court.
d. the debtor corporation files the petition in an involuntary
filing.
LO1
11.

Creditor committees are elected
a. in all bankruptcy cases.
b. in Chapter 7 cases.
c. only
in
bankruptcy

cases
petitions.
d. in Chapter 11 cases.

LO2
12.

arising

from

involuntary

The first-to-last ranking order of priority of the following:
I.stockholder claims
II.unsecured priority claims
III.secured claims
II.unsecured nonpriority claims
in a Chapter 7 bankruptcy case is
a.
b.
c.
d.

LO2
13.

I,II,IV, and III.
III,II,IV and I.
III,I,IV, and II.

II,IV,III,and I.

In typical trustee accounting
a. gains and losses on the sale of assets are charged to the
estate equity account.
b. unrecorded liabilities discovered by the trustee are
credited to the estate equity account and credited to the
liability account.
c. liquidation expenses are charged to the estate equity
account.
d. all of the above procedures are typical for trustee
accounting.

©2009 Pearson Education, Inc. publishing as Prentice Hall
17-3


To download more slides, ebook, solutions and test bank, visit

LO2
14.

Trustees in a bankruptcy cases have the duty to
a.
b.
c.
d.

LO3
15.

If a debtor has material gains on its debt restructurings,
these gains will be reported as
a.
b.
c.
d.

LO3
16.

lower of cost or market value of the note receivable.
book value of the transferred assets.
fair market value of the note receivable.
fair market value of the transferred assets.

A judge would permit a debtor-in-possession in a
a.
b.
c.
d.

LO4
18.

operating gains of the debtor.
other non-operating gains of the debtor.
extraordinary gains of the debtor.
discontinued operations.

A creditor will record assets transferred in full settlement of
a note receivable at the
a.
b.
c.
d.

LO3
17.

nullify affiliate transactions.
relegate tax payments to an unsecured status.
call creditor meetings on liquidation proceedings.
provide payments to creditors and customers.

case with only secured creditors.
Chapter 7 case.
Chapter 11 case.
voluntary case.

Under the AICPA’s SOP 90-7, a reorganized company must meet a
“reorganization value test” as one of the two conditions
necessary for fresh start accounting. Reorganization value
approximates the
a.
b.
c.
d.

fair

fair
book
None

value of the
value of the
value of the
of the above

entity’s total assets.
entity’s net assets.
entity’s net assets.
choices are correct.

©2009 Pearson Education, Inc. publishing as Prentice Hall
17-4


To download more slides, ebook, solutions and test bank, visit

LO4
19.

Under the AICPA’s SOP 90-7, “prepetition liabilities subject to
compromise” are liabilities incurred before the Chapter 11
filing and are classified as
a.
b.
c.
d.

LO4
20.

residual claims.
contingent claims.
current operating claims.
unsecured and undersecured claims.

Which of the following statements is correct concerning
companies emerging from reorganization under Chapter 11 when
they do not qualify for fresh start accounting?
a. The forgiveness of debt is reported as an operating gain.
b. Quasi-reorganization accounting is used.
c. The forgiveness of debt is reported as an extraordinary
item.
d. The forgiveness of debt is reported as an increase in
contributed capital.

©2009 Pearson Education, Inc. publishing as Prentice Hall
17-5


To download more slides, ebook, solutions and test bank, visit

LO2
Exercise 1
Archery Corporation is liquidating under Chapter 7 of the Bankruptcy
Act. The accounts of Archery at the time of filing are summarized as
follows:

Cash
Accounts receivable-net
Inventory
Equipment-net
Land
Building-net
Goodwill

$

$
Accounts payable
Wages and salaries
Contributions due to pension plan
Taxes payable
Accrued interest payable (includes
$10,000 from the mortgage payable and
$2,000 from the note payable)
Note payable
Mortgage payable
Capital stock
Deficit

$

(
$

Book Value

10,000 $
60,000
110,000
70,000
20,000
200,000
42,000
512,000

Estimated
Realizable
Value
10,000
50,000
70,000
70,000
40,000
150,000

120,000
30,000
20,000
80,000
12,000

100,000
100,000
70,000
20,000 )
512,000

The land and building are pledged as security for the mortgage
payable as well as any accrued interest on the mortgage. The note
payable is secured with the equipment, but the interest on the note
is unsecured. Wages and salaries were accrued within the last 90 days
and pension plan contributions were accrued within the last 6 months;
neither exceeds $4,000 per employee. Liquidation expenses are
expected to be $50,000.

Required:
1. Prepare a schedule showing the
creditors and the expected payouts.

priority

rankings

of

©2009 Pearson Education, Inc. publishing as Prentice Hall
17-6

the


To download more slides, ebook, solutions and test bank, visit

2. Banyo Corporation was a supplier to Archery Corporation and at
the time of Archery’s bankruptcy filing, Banyo’s account
receivable from Archery was $40,000. On the basis of the

estimates, how much can Banyo expect to receive?
LO2
Exercise 2
Hinsch Company is in bankruptcy and is being liquidated under the
provisions of Chapter 7 of the bankruptcy code. The trustee has
converted all assets into $120,000 cash and has prepared the
following list of approved claims:
Customer deposits ($1,000 from each of two customers
that ordered products that were never delivered)

$

Property taxes payable

2,000
4,000

Accounts payable, unsecured

30,000

Trustee’s fees and other costs of liquidation

16,000

Mortgage payable, secured by property that was sold
for $80,000

60,000

Note payable to bank, secured by all accounts
receivable of which $30,000 were collected and $10,000
were written off as uncollectible

30,000

Required
How much will the bank receive on the note payable?

LO2
Exercise 3
Ingham Corporation is being liquidated under Chapter 7 of the
Bankruptcy Act. The trustee has determined that the unsecured claims
will receive $.30 on the dollar. Platinum Corporation holds a $35,000
mortgage note receivable from Ingham that is secured by equipment
with a $17,500 book value and a $7,000 fair value.
Required:
How much of the mortgage receivable will be recovered by Platinum?

©2009 Pearson Education, Inc. publishing as Prentice Hall
17-7


To download more slides, ebook, solutions and test bank, visit

LO2*&
Exercise 4
Buckley Corporation incurred major losses in 2005 and entered into
voluntary Chapter 7 bankruptcy in the early part of 2006. By July 1,
all assets were converted into cash, the secured creditors were paid,

and $74,000 in cash was left to pay the remaining claims as follows:
Accounts payable
Claims prior to the trustee’s appointment
Property taxes payable
Wages payable (all under $4,000 per employee)
Unsecured note payable
Accrued interest on the note payable
Administrative expenses of the trustee
Total

$

$

22,000
4,000
7,500
21,000
28,000
3,000
15,000
100,500

Required:
Classify the claims by their Chapter 7 priority ranking, and analyze which
amounts will be paid and which amounts will be written off.
LO2
Exercise 5
Jones Corporation is being liquidated under Chapter 7 of the
Bankruptcy Act. The trustee has determined that the unsecured claims

will receive $.50 on the dollar. Kevin Corporation holds a $200,000
mortgage note receivable from Jones that is secured by marketable
securities with a $150,000 book value and a $164,000 fair value.
Required:
How much of the mortgage receivable will Kevin recover?

LO2
Exercise 6
Kresta Corporation is being liquidated under Chapter 7 of the
Bankruptcy Act. The trustee has determined that the unsecured claims
will receive $.25 on the dollar. Loanstar Corporation holds an
$80,000 mortgage note receivable from Kresta that is secured by
marketable securities with an $88,000 book value and a $60,000 fair
value.
Required:
How much of the mortgage receivable will Loanstar recover?
©2009 Pearson Education, Inc. publishing as Prentice Hall
17-8


To download more slides, ebook, solutions and test bank, visit

LO3
Exercise 7
On December 31, 2005, Goldcoast bank agreed to restructure an
$800,000, 10% loan receivable from Fielding Corporation because of
Fielding’s financial problems. The loan was issued at par and at
December 31, there was $40,000 of accrued interest for a six-month
period. Terms of the restructuring agreement are as follows:
** Reduce the loan from $800,000 to $600,000;

** Extend the maturity date by 2 years from December 31, 2005
to December 31, 2007; and,
** Reduce the interest rate on the loan from 10% to 6%.
Present value assumptions:
Present
Present
Present
Present

value
value
value
value

of
of
of
of

$1
$1
an
an

for 2 years at 6%
for 2 years at 10%
annuity of $1 for 2 years at 6%
annuity of $1 for 2 years at 10%

=

=
=
=

0.8900
0.8264
1.8334
1.7355

Required:
1. What amount of gain or loss from restructuring the loan will
Fielding report for 2005?
2. Compute the gain or loss that will be reported by Goldcoast
Bank. Assume that the bank has not recognized an impairment
before the restructuring.
LO3
Exercise 8
Logan Corporation owes Mango Finance Company $825,000 plus $53,750 of
accrued interest. Logan has a cash flow shortage and arranges for an
equity settlement of the loan with Mango by issuing 55,000 shares of
its $1.00 par value common stock to Mango on April 1, 2006. Logan
common stock has a market value of $13.75 per share on April 1.
Required:
Prepare
Logan's
restructuring.

journal

entry

to

record

the

troubled

©2009 Pearson Education, Inc. publishing as Prentice Hall
17-9

debt


To download more slides, ebook, solutions and test bank, visit

LO3
Exercise 9
Matrix Corporation owes Norman Finance Company $750,000 on a note
payable plus $37,500 of accrued interest. Matrix has a cash flow
shortage and negotiates a debt restructuring with Norman by issuing
60,000 shares of its $1.00 par value common stock to Norman on
January 1, 2006. Matrix's common stock has a market value of $10.10
per share on January 1st.
Required:
Prepare Matrix's
restructuring.

journal

entry

to

record

the

troubled

debt

LO3
Exercise 10
On December 31, 2006, Galvin Bank agreed to restructure a $900,000,
10% loan receivable from Hines Corporation because of Hines’
financial problems. The debt was issued at par and at December 31,
there was accrued interest of $60,000 for six months. Terms of the
restructuring agreement are as follows:
** Reduce the loan from $900,000 to $600,000;
** Extend the maturity date of the loan by 2 years from December
31, 2006 to December 31, 2008; and,
** Reduce the interest rate from 10% to 8%.
Present value assumptions:
Present
Present
Present
Present

value
value
value
value

of
of
of
of

$1
$1
an
an

for 2 years at 8%
for 2 years at 10%
annuity of $1 for 2 years at 8%
annuity of $1 for 2 years at 10%

=
=
=
=

0.8573
0.8264
1.7833
1.7355

Required:
1. What amount of gain or loss from restructuring the loan will
Hines report for 2006?
2. Compute the gain or loss that will be reported by Galvin Bank.
Assume that the bank has not recognized an impairment before the
restructuring.

©2009 Pearson Education, Inc. publishing as Prentice Hall
17-10


To download more slides, ebook, solutions and test bank, visit

SOLUTIONS
Multiple Choice Questions
1.

a

2.

d

3.

d

4.

c

5.

d

6.

d

7.

d

8.

c

9.

c

10.

a

11.

b

12.

b

13.

d

14.

d

15.

c

16.

d

17.

b

18.

a

19.

d

20.

c

©2009 Pearson Education, Inc. publishing as Prentice Hall
17-11


To download more slides, ebook, solutions and test bank, visit

Exercise 1
Requirement 1

Amount
of Claim

Expected
Payment

Estimated available cash
Secured claims:
Mortgage payable & interest

$

Partially secured claims:
Note payable ($30,000
reclassified as unsecured)
Unsecured priority claims:

Estimated liquidation expenses
Wages and salaries
Pension fund liability
Taxes payable
Unsecured nonpriority claims:
Accounts payable
Unsecured portion of note
payable
Accrued interest on note
payable

$

110,000 $

Estimated
Remaining
Cash
$
390,000

110,000 $

280,000

100,000

70,000

210,000

50,000
30,000
20,000
80,000

50,000
30,000
20,000
80,000

160,000
130,000
110,000
30,000

120,000
30,000
2,000

0

Expected return on the dollar for unsecured nonpriority claims:
$30,000/$150,000 = $.20 on the dollar
Requirement 2
Banyo’s estimated return: $40,000 claim x $.20 = $8,000

©2009 Pearson Education, Inc. publishing as Prentice Hall
17-12

To download more slides, ebook, solutions and test bank, visit

Exercise 2
Cash
Mortgage payable, paid in full

$
(

Note payable to bank, secured portion
Priority claims ($16,000 of administrative costs +
$2,000 of customer deposits + $4,000 property tax)
Available for unsecured nonpriority claims

Unsecured, nonpriority claims:
Unsecured portion of note payable to bank
Accounts payable
Total unsecured, nonpriority claims

(

(
$

$

120,000
60,000 )
60,000

30,000 )
30,000
22,000 )
8,000

$

10,000
30,000
40,000

Amount paid to bank:
$30,000 for secured portion + ($10,000 x .20) for
unsecured portion
=
$

32,000

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

Exercise 3
Mortgage note receivable
Less: Portion secured by equipment
Unsecured portion

$

Estimated recovery on secured portion
Estimated recovery on unsecured portion

($28,000 x $.30) =
Recovery on mortgage note receivable

$

7,000

$

8,400
15,400

(
$

35,000
7,000 )
28,000

©2009 Pearson Education, Inc. publishing as Prentice Hall
17-13


To download more slides, ebook, solutions and test bank, visit

Exercise 4
Requirement 1
Unsecured priority claims:

Administrative expenses

$

Claims prior to the trustee’s
appointment
Wages payable
Property taxes payable

Unsecured Nonpriority Claims:

Accounts payable
Unsecured note
Accrued interest on the note

Claim
Amount
15,000 $

$

Cash
Left
59,000

4,000

4,000

55,000

21,000

21,000

34,000

7,500

7,500

26,500

Claim
Amount
$

To be
Paid
15,000

To be
Paid

Written
Off

22,000 $

11,660 *$

10,340

28,000

14,840 **

13,160

3,000

0

3,000

(

$26,500/($22,000 + $28,000)
= 53%
* $22,000 x 53% = $11,660
**$28,000 x 53% = $14,840

Exercise 5
Mortgage note receivable
Less: Portion secured by marketable securities
Unsecured portion

$
$

200,000

164,000 )
36,000

Estimated recovery on secured portion
Estimated recovery on unsecured portion
($36,000 x $.50) =
Recovery on mortgage note receivable

$

164,000

$

18,000
182,000

©2009 Pearson Education, Inc. publishing as Prentice Hall
17-14


To download more slides, ebook, solutions and test bank, visit

Exercise 6
Mortgage note receivable
Less: Portion secured by marketable securities
Unsecured portion

$
$

80,000
60,000 )
20,000

Estimated recovery on secured portion
Estimated recovery on unsecured portion
(20,000 x $.25) =
Recovery on mortgage note receivable

$

60,000

$

5,000
65,000

(

Exercise 7
Requirement 1
Fielding’s gain on restructuring:
Carrying value of the debt ($800,000 + $40,000
accrued interest)
Total future cash flows
($600,000 + $72,000 interest)
Gain on restructuring

$

840,000
(

$

672,000 )
168,000

Requirement 2
Goldcoast Bank’s loss on restructuring:
Carrying value of the loan before restructuring
$
Present value of $600,000 due in 2 years at 10%
historical rate: $600,000 x .8264 =
$495,840
Present value of $36,000 interest for 2
years at 10% historical rate =
$36,000 x 1.7355 =
62,478
Carrying value of the loan
$558,318
(

840,000

Loss on restructuring

281,682

$

558,318 )

Exercise 8
Note payable
Accrued interest payable
Common stock, $10 par
Capital paid in excess of par
Extraordinary gain on restructuring

825,000
53,750
55,000
756,250
67,500

©2009 Pearson Education, Inc. publishing as Prentice Hall
17-15


To download more slides, ebook, solutions and test bank, visit

Exercise 9
Note payable
Accrued interest payable
Common stock, $1 par
Capital paid in excess of par
Extraordinary gain on restructuring

750,000
37,500
40,000
546,000
201,500

Exercise 10
Requirement 1
Hines’ gain on restructuring:
Carrying value of the debt ($900,000 + $60,000
accrued interest)
Total future cash flows
($600,000 + $96,000 interest)
Gain on restructuring

$

960,000
(

$

696,000 )
264,000

Requirement 2
Galvin’s loss on restructuring:
Carrying value of the loan before restructuring
$

Present value of $600,000 due in 2 years at 10%
historical rate: $600,000 x .8264 =
$495,840
Present value of $48,000 interest for 2
years at 10% historical rate =
$48,000 x 1.7355 =
83,304
Carrying value of the loan
$579,144
(

960,000

Loss on restructuring

380,856

$

579,144 )

©2009 Pearson Education, Inc. publishing as Prentice Hall
17-16