Exam Questions – Ch.10 – Insolvency—Liquidation and

Package Title: Test Bank Questions

Course Title: Advanced Accounting, 6e

Chapter Number: 10

Question type: Multiple Choice

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

a) bankrupt.

b) overdrawn.

c) insolvent.

d) liquidating.

Question Title: Test Bank (Multiple Choice) Question 01

Difficulty: Easy

Learning Objective: 1 Distinguish between a Chapter 7 and a Chapter 11 bankruptcy.

Section Reference: 10.0

2) When a business becomes insolvent, it generally has three possible courses of action. Which of the following is NOT one of the three possible courses of action?

a) The debtor and its creditors may enter into a contractual agreement, outside of formal bankruptcy proceedings.

b) The debtor continues operating the business in the normal course of the day-to-day operations.

c) The debtor or its creditors may file a bankruptcy petition, after which the debtor is liquidated under Chapter 7.

d) The debtor or its creditors may file a petition for reorganization under Chapter 11.

Question Title: Test Bank (Multiple Choice) Question 02

Difficulty: Easy

Learning Objective: 5 Describe contractual agreements that the debtor and its creditors may enter into outside of formal bankruptcy proceedings to resolve the debtor’s insolvent position.

Section Reference: 10.1

3) Assets transferred by the debtor to a creditor to settle a debt are transferred at:

a) book value of the debt.

b) book value of the transferred assets.

c) fair market value of the debt.

d) fair market value of the transferred assets.

Question Title: Test Bank (Multiple Choice) Question 03

Difficulty: Easy

Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.

Section Reference: 10.4

4) A composition agreement is an agreement between the debtor and its creditors whereby the creditors agree to:

a) accept less than the full amount of their claims.

b) delay settlement of the claim until a later date.

c) force the debtor into a liquidation.

d) accrue interest at a higher rate.

Question Title: Test Bank (Multiple Choice) Question 04

Difficulty: Easy

Learning Objective: 5 Describe contractual agreements that the debtor and its creditors may enter into outside of formal bankruptcy proceedings to resolve the debtor’s insolvent position.

Section Reference: 10.1

5) In a troubled debt restructuring involving a modification of terms, the debtor’s gain on restructuring:

a) will equal the creditor’s gain on restructuring.

b) will equal the creditor’s loss on restructuring.

c) may not equal the creditor’s gain on restructuring.

d) may not equal the creditor’s loss on restructuring.

Question Title: Test Bank (Multiple Choice) Question 05

Difficulty: Easy

Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.

Section Reference: 10.4

6) A bankruptcy petition filed by a firm is a:

a) chapter petition.

b) involuntary petition.

c) voluntary petition.

d) chapter 11 petition.

Question Title: Test Bank (Multiple Choice) Question 06

Difficulty: Easy

Learning Objective: 3 Distinguish between a voluntary and involuntary bankruptcy petition.

Section Reference: 10.2

7) When a bankruptcy court enters an “order for relief” it has:

a) accepted the petition.

b) dismissed the petition.

c) appointed a trustee.

d) started legal action against the debtor by its creditors.

Question Title: Test Bank (Multiple Choice) Question 7

Difficulty: Easy

Learning Objective: 3 Distinguish between a voluntary and involuntary bankruptcy petition.

Section Reference: 10.2

8) An involuntary petition filed by a firm’s creditors whereby there are twelve or more creditors must be signed by at least:

a) two creditors.

b) three creditors.

c) five creditors.

d) six creditors.

Question Title: Test Bank (Multiple Choice) Question 08

Difficulty: Easy

Learning Objective: 3 Distinguish between a voluntary and involuntary bankruptcy petition.

Section Reference: 10.2

9) The duties of the trustee include:

a) appointing creditors’ committees in liquidation cases.

b) approving all payments for debts incurred before the bankruptcy filing.

c) examining claims and disallowing any that are improper.

d) calling a meeting of the debtor’s creditors.

Question Title: Test Bank (Multiple Choice) Question 09

Difficulty: Easy

Learning Objective: 1 Distinguish between a Chapter 7 and a Chapter 11 bankruptcy.

Section Reference: 10.3

10) Which of the following items is NOT a specified priority for unsecured creditors in a bankruptcy petition?

a) Administration fees incurred in administering the bankrupt’s estate.

b) Unsecured claims for wages earned within 90 days and are less than $4,650 per employee.

c) Unsecured claims of governmental units for unpaid taxes.

d) Unsecured claims on credit card charges that do not exceed $3,000.

Question Title: Test Bank (Multiple Choice) Question 10

Difficulty: Medium

Learning Objective: 2 Describe the five priority categories of unsecured claims and list the order in which they are settled.

Section Reference: 10.2

11) Which statement with respect to gains and losses on troubled debt restructuring is correct?

a) Creditors losses on restructuring are extraordinary.

b) Debtor’s gains and losses on asset transfers and debtor’s gains on restructuring are combined and treated as extraordinary.

c) Debtor gains and creditor losses on restructuring are extraordinary, if material in amount.

d) Debtor losses on asset transfers and debtor gains on restructuring are reported as a component of net income.

Question Title: Test Bank (Multiple Choice) Question 11

Difficulty: Medium

Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.

Section Reference: 10.4

12) When fresh-start reporting is used according to Statement of Position (SOP) 90-7 (now incorporated in FSB ASC topic 852), the implication is that a new firm exists. Which of the following statements is NOT correct about fresh-start accounting?

a) Assets are reported at fair values.

b) Beginning retained earnings is reported at zero.

c) The fair value of the assets must be less than the post liabilities and allowed claims.

d) The original owners must own less than 50% of the voting stock after reorganization.

Question Title: Test Bank (Multiple Choice) Question 12

Difficulty: Medium

Learning Objective: 1 Distinguish between a Chapter 7 and a Chapter 11 bankruptcy.

Section Reference: 10.4

13) A Statement of Affairs is a report designed to show:

a) an estimated amount that would be received by each class of creditor’s claims in the event of liquidation.

b) a balance sheet prepared on the going-concern assumption.

c) assets and liabilities classified as current and noncurrent.

d) assets and liabilities reported at their current book values.

Question Title: Test Bank (Multiple Choice) Question 13

Difficulty: Easy

Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.

Section Reference: 10.4

14) When a secured claim is not fully settled by the selling of the underlying collateral, the remaining portion:

a) of the claim cannot be collected by the creditor.

b) remains as a secured claim.

c) is classified as an unsecured priority claim.

d) is classified as an unsecured nonpriority claim.

Question Title: Test Bank (Multiple Choice) Question 14

Difficulty: Medium

Learning Objective: 4 Distinguish among fully secured, partially secured, and unsecured claims of creditors.

Section Reference: 10.2

15) Lyme Corporation entered into a troubled debt restructuring agreement with their local bank. The bank agreed to accept land with a carrying amount of $360,000 and a fair value of $540,000 in exchange for a note with a carrying amount of $765,000. Ignoring income taxes, what amount should Lyme report as a gain on its income statement?

a) $0.

b) $180,000.

c) $225,000.

d) $405,000.

Question Title: Test Bank (Multiple Choice) Question 15

Difficulty: Medium

Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.

Section Reference: 10.4

16) The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by North Co. to Bell Co. in full settlement of North’s liability to Bell:

What amount should North report as ordinary gain (loss) on transfer of real estate?

a) $(30,000).

b) $30,000.

c) $120,000.

d) $150,000.

Question Title: Test Bank (Multiple Choice) Question 16

Difficulty: Medium

Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.

Section Reference: 10.4

17) The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by North Co. to Bell Co. in full settlement of North’s liability to Bell:

What amount should Bell report as a gain or (loss) on restructuring?

a) $120,000 ordinary loss.

b) $120,000 extraordinary loss.

c) $150,000 ordinary loss.

d) $150,000 extraordinary loss.

Question Title: Test Bank (Multiple Choice) Question 17

Difficulty: Medium

Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.

Section Reference: 10.4

18) Dobby Corporation was forced into bankruptcy and is in the process of liquidating assets and paying claims. Unsecured claims will be paid at the rate of thirty cents on the dollar. Carson holds a note receivable from Dobby for $75,000 collateralized by an asset with a book value of $50,000 and a liquidation value of $25,000. The amount to be realized by Carson on this note is:

a) $25,000.

b) $40,000.

c) $50,000.

d) $75,000.

Question Title: Test Bank (Multiple Choice) Question 18

Difficulty: Medium

Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.

Section Reference: 10.4

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

Assume the assets are converted to cash at their estimated current values. What amount of cash will be available to pay unsecured nonpriority claims?

a) $720,000.

b) $840,000.

c) $960,000.

d) $1,080,000.

Question Title: Test Bank (Multiple Choice) Question 19

Difficulty: Hard

Learning Objective: 4 Distinguish among fully secured, partially secured, and unsecured claims of creditors.

Section Reference: 10.2

20) The final settlement with unsecured creditors is computed by dividing:

a) total net realizable value by total unsecured creditor claims.

b) net free assets by total secured creditor claims.

c) total net realizable value by total secured creditor claims.

d) net free assets by total unsecured creditor claims.

Question Title: Test Bank (Multiple Choice) Question 20

Difficulty: Easy

Learning Objective: 4 Distinguish among fully secured, partially secured, and unsecured claims of creditors.

Section Reference: 10.2

21) Ford Corporation entered into a troubled debt restructuring agreement with their local bank. The bank agreed to accept land with a carrying value of $200,000 and a fair value of $300,000 in exchange for a note with a carrying amount of $425,000. Ignoring income taxes, what amount should Ford report as a gain on its income statement?

a) $0.

b) $100,000.

c) $125,000.

d) $225,000.

Question Title: Test Bank (Multiple Choice) Question 21

Difficulty: Medium

Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.

Section Reference: 10.4

22) The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by MSG Co. to Beta Co. in full settlement of MSG’s liability to Beta:

What amount should MSG report as ordinary gain (loss) on transfer of real estate?

a) $(25,000).

b) $25,000.

c) $100,000.

d) $125,000.

Question Title: Test Bank (Multiple Choice) Question 22

Difficulty: Medium

Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.

Section Reference: 10.4

23) The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by MSG Co. to Beta Co. in full settlement of MSG’s liability to Beta:

What amount should Beta report as a gain or (loss) on restructuring?

a) $100,000 ordinary loss.

b) $100,000 extraordinary loss.

c) $125,000 ordinary loss.

d) $125,000 extraordinary loss.

Question Title: Test Bank (Multiple Choice) Question 23

Difficulty: Easy

Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.

Section Reference: 10.4

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

Assume the assets are converted to cash to their estimated current values. What amount of cash will be available to pay unsecured nonpriority claims?

a) $360,000.

b) $420,000.

c) $480,000.

d) $540,000.

Question Title: Test Bank (Multiple Choice) Question 24

Difficulty: Hard

Learning Objective: 4 Distinguish among fully secured, partially secured, and unsecured claims of creditors.

Section Reference: 10.4

25) Tangent Corporation was forced into bankruptcy and is in the process of liquidating assets and paying claims. Unsecured claims will be paid at the rate of thirty cents on the dollar. Arrow holds a note receivable from Tangent for $90,000 collateralized by an asset with a book value of $60,000 and a liquidation value of $30,000. The amount to be realized by Arrow on this note is:

a) $30,000.

b) $48,000.

c) $60,000.

d) $90,000.

Question Title: Test Bank (Multiple Choice) Question 25

Difficulty: Medium

Learning Objective: 4 Distinguish among fully secured, partially secured, and unsecured claims of creditors.

Section Reference: 10.2

Question Type: Essay

26) The Bankruptcy Reform Act assigns priorities to certain unsecured claims, and each rank must be satisfied in full before the next–lower rank is paid. Identify the five categories of unsecured creditor claims.

• Administration expenses and fees incurred in administering the bankrupt’s estate.
• Unsecured claims for wages and salaries earned within 90 days before the date of filing of the petition.
• Unsecured claims for contributions to employee benefit plans from services provided within 180 days before the date of filing of the petition.
• Unsecured claims of individuals arising from deposits for the purchase, lease, or rental of property or services that were not delivered.
• Unsecured claims of governmental units for unpaid taxes.

Question Title: Test Bank (Essay) Question 26

Difficulty: Medium

Learning Objective: 2 Describe the five priority categories of unsecured claims and list the order in which they are settled.

Section Reference: 10.2

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

Question Title: Test Bank (Essay) Question 27

Difficulty: Easy

Learning Objective: 4 Distinguish among fully secured, partially secured, and unsecured claims of creditors.

Section Reference: 10.2

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

Required:

Prepare the journal entries to record the restructuring of the debt by Deal Mart.

Land 310,000

Gain on Disposal of Land 310,000

Note Payable 1,600,000

Interest Payable 128,000

Land 1,310,000

Gain on Debt Restructuring 418,000

Question Title: Test Bank (Problem) Question 10-1

Difficulty: Medium

Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.

Section Reference: 10.4

29) On January 1, 2016, Terminator, Inc. owed 9th National Bank $12 million on a 10% note due December 31, 2017. Interest was last paid on December 31, 2015. Terminator was experiencing severe financial difficulties and asked 9th National Bank to modify the terms of the debt agreement. After negotiation 9th National Bank agreed to:

- Forgive the interest accrued for the year just ended,

- Reduce the remaining two years interest payments to $900,000 each and delay the first payment until December 31, 2017, and

- Reduce the unpaid principal amount to $9,600,000.

Required:

Prepare the journal entries for Terminator, Inc. necessitated by the restructuring of the debt at (1) January 1, 2016, (2) December 31, 2017, and (3) December 31, 2015.

Carrying amount: $12,000,000 + $1,200,000 = $13,200,000

Future payments: ($900,000 × 2) + 9,600,000 = 11,400,000

Gain to debtor/Loss to creditor $ 1,800,000

January 1, 2016

Interest Payable 1,200,000

Note Payable 600,000

Gain on Debt Restructuring 1,800,000

December 31, 2017

Note Payable 900,000

Cash 900,000

December 31, 2018

Note Payable 900,000

Cash (Interest) 900,000

Note Payable 9,600,000

Cash (Principal) 9,600,000

Question Title: Test Bank (Problem) Question 10-2

Difficulty: Hard

Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.

Section Reference: 10.4

30) On January 2, 2017 Cretin Co., was indebted to Fourth National Bank under a $12 million, 10% unsecured note. The note was signed January 2, 2015, and was due December 31, 2020. Annual interest was last paid on December 31, 2015. Cretin Co. negotiated a restructuring of the terms of the debt agreement due to financial difficulties.

Required:

Prepare all journal entries for Cretin Co., to record the restructuring and any remaining transactions relating to the debt under each independent assumption.

A. Fourth National Bank agreed to settle the debt in exchange for land which cost Cretin Co. $8,500,000 and has a fair market value of $10,000,000.

B. Fourth National Bank agreed to (1) forgive the accrued interest from last year (2) reduce the remaining four interest payments to $600,000 each, and (3) reduce the principal to $9,000,000.

A. January 2, 2017

Land 1,500,000

Gain on Disposal of Land 1,500,000

Interest Payable 1,200,000

Note Payable 12,000,000

Land 10,000,000

Gain on Debt Restructuring 3,200,000

B. Carrying amount $12,000,000 + $1,200,000 = $13,200,000

Future payments ($600,000 × 4) + $9,000,000 = 11,400,000

Gain to debtor/Loss to creditor $ 1,800,000

January 2, 2017

Interest Payable 1,200,000

Note Payable 600,000

Gain on Debt Restructuring 1,800,000

December 31, 2017, 2018, 2019, 2020

Note Payable (Interest) 600,000

Cash 600,000

December 31, 2020

Note Payable 9,000,000

Cash 9,000,000

Question Title: Test Bank (Problem) Question 10-3

Difficulty: Hard

Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.

Section Reference: 10.4

31) On December 31, 2017, Pilot’s Credit Union agreed to restructure a $900,000, 8% loan receivable from Norma Corporation because of Norma’s financial problems. At December 31 there was $36,000 of accrued interest for a six-month period. Terms of the restructuring agreement are as follows:

- Reduce the loan from $900,000 to $600,000;

- Extend the maturity date by 2 years from December 31, 2017 to December 31, 2019;

- Reduce the interest rate on the loan from 8% to 6%.

Present value assumptions:

Present value of $1 for 2 years at 6% = 0.8900

Present value of $1 for 2 years at 8% = 0.8573

Present value of an ordinary annuity of $1 for 2 years at 6% = 1.8334

Present value of an ordinary annuity of $1 for 2 years at 8% = 1.7833

Required:

Compute the gain or loss that will be reported by Pilot’s Credit Union.

Carrying value of the loan before restructuring $936,000

Present value of $600,000 due in 2 years at 8%

historical rate: ($600,000 × 0.8573) = $514,380

Present value of $36,000 interest for 2 years at

8% historical rate: ($36,000 × 1.7833) = 64,199

Carrying value of the loan $578,579 (578,579)

Loss on restructuring $357,421

Question Title: Test Bank (Problem) Question 10-4

Difficulty: Hard

Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.

Section Reference: 10.4

32) O’Donnell Corporation incurred major losses in 2016 and entered into voluntary Chapter 7 bankruptcy in the early part of 2017. By June 1, all assets were converted into cash, the secured creditors were paid, and $150,000 in cash was left to pay the remaining claims as follows.

Accounts payable $ 48,000

Claims prior to the trustee’s appointment 21,000

Property taxes payable 18,000

Wages payable (all under $4,650 per employee) 54,000

Unsecured note payable 60,000

Accrued interest on the note payable 6,000

Administrative expenses of the trustee 30,000

Total $237,000

Required:

Classify the claims by their Chapter 7 priority ranking, and analyze which amounts will be paid and which amounts will be written off.

Unsecured priority claims:

Claim To be Cash

Amount Paid Left

$150,000

Administrative expenses $30,000 $30,000 120,000

Claims prior to the trustee’s appointment 21,000 21,000 99,000

Wages payable 54,000 54,000 45,000

Property taxes payable 18,000 18,000 27,000

Unsecured Nonpriority Claims:

Claim To be Written

Amount Paid Off

Accounts payable $ 48,000 $12,000* $36,000

Unsecured note 60,000 15,000** 45,000

Accrued interest on the note 6,000 0 6,000

$27,000 / ($48,000 + $60,000) = .25

* $48,000 × 0.25 = $12,000

**$60,000 × 0.25 = $15,000

Question Title: Test Bank (Problem) Question 10-5

Difficulty: Medium

Learning Objective: 4 Distinguish among fully secured, partially secured, and unsecured claims of creditors.

Section Reference: 10.2

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

Estimated Net

Book Value Realizable Values

Cash $ 3,000 $ 3,000

Accounts receivable-net 72,000 48,000

Inventories 60,000 72,000

Equipment-net 165,000 87,000

Total assets $300,000 $210,000

Accounts payable $ 72,000

Rent payable 21,000

Wages payable 45,000

Note payable plus accrued interest 96,000

Capital stock 180,000

Retained earnings (deficit) (120,000)

Total liabilities and equity $300,000

Required:

A. Prepare a statement of affairs assuming that the note payable and interest are secured by a mortgage on the equipment and that wages are less than $4,650 per employee.

B. Estimate the amount that will be paid to each class of claims if priority liquidation expenses including trustee fees are $24,000 and estimated net realizable values are actually realized.

A.

Down Dog Corporation

Statement of Affairs

June 30, 2017

Deficiency

Account

Book Value Assets Realizable Value (Loss/Gain)

Pledged with partially secured creditors

$165,000 Equipment-net $87,000 (78,000)

Less: Note payable and accrued interest (96,000)

Unsecured amount (See below) (9,000)

Free Assets

3,000 Cash 3,000

72,000 Accounts receivable-net 48,000 (24,000)

60,000 Inventories 72,000 12,000

Total net realizable value 123,000

Less: Priority liabilities – wages payable <45,000>

Total available for unsecured creditors 78,000

______ Estimated deficiency to unsecured creditors 30,000 ______

$300,000 $108,000 (90,000)

Unsecured

Book Value Equities Liabilities

Priority liabilities

$ 45,000 Wages payable (assumed under

$4,650 per employee) $ 45,000

Partially secured creditors

96,000 Note payable and accrued interest $ 96,000

Less: Equipment pledged as security (87,000) $ 9,000

Unsecured creditors

72,000 Accounts payable 72,000

27,000 Rent payable 27,000

Stockholders’ equity

180,000 Capital stock 180,000

(120,000) Retained earnings (deficit) ______ (120,000)

$300,000 $108,000 $ 60,000

Estimated Deficiency $(30,000)

B. Estimated payments per dollar for unsecured creditors

Cash available $210,000

Distribution to partially secured and unsecured priority creditors:

Note payable and interest $87,000

Administrative expenses 24,000

Wages payable 45,000 < 156,000>

Available to unsecured nonpriority creditors $ 54,000

Note payable and interest (unsecured portion) $ 9,000

Accounts payable 72,000

Rent payable 27,000

Unsecured nonpriority claims $108,000

($54,000 / $108,000 = $0.50 per dollar)

Partially secured

Note payable and interest

Secured portion $87,000

Unsecured portion ($9,000 × 0.50) 4,500 $91,500

Unsecured priority

Administrative expenses $24,000

Wages payable 45,000 69,000

Unsecured nonpriority

Accounts payable ($72,000 × 0.50 $36,000

Rent payable ($27,000 × 0.50) 13,500 49,500

Total payments $210,000

Question Title: Test Bank (Problem) Question 10-6

Difficulty: Hard

Learning Objective: 1 Distinguish between a Chapter 7 and a Chapter 11 bankruptcy., 4 Distinguish among fully secured, partially secured, and unsecured claims of creditors., 6 Describe the ways debt may be restructured in a reorganization.

Section Reference: 10.4

34) The following data are taken from the statement of affairs of Motor Sports Company.

Assets pledged with fully secured creditors

(Realizable value, $635,000) $800,000

Assets pledged with partially secured creditors

(realizable value, $300,000) 365,000

Free assets (Realizable value, $340,000) 535,000

Fully secured creditor claims 316,000

Partially secured creditor claims 400,000

Unsecured creditor claims with priority 100,000

General unsecured creditor claims 1,165,000

Required:

Compute the amount that will be paid to each class of creditor.

Realizable value of all assets ($635,000 + $300,000 + $340,000) $1,275,000

Allocated to:

Fully secured creditors (316,000)

Partially secured creditors (300,000)

Unsecured creditors with priority (100,000)

Remainder available to general unsecured creditors $559,000

Payment rate to general unsecured creditors

(Including balance due to partially secured creditors)

$559,000 / ($1,165,000 + ($400,000 - $300,000)) 44.2%

Realizable value of assets:

Assets pledged to fully secured creditors $635,000

Assets pledged to partially secured creditors 300,000

Free assets 340,000

Total realizable value $1,275,000

Amounts to be paid to:

Fully secured creditors $316,000

Partially secured creditors [$300,000 + (0.442 × $100,000)] 344,200

Unsecured creditors with priority 100,000

General unsecured creditors (0.442 × $1,165,000) 514,800*

Total $1,275,000

*Rounded $130

Question Title: Test Bank (Problem) Question 10-7

Difficulty: Medium

Learning Objective: 4 Distinguish among fully secured, partially secured, and unsecured claims of creditors.

Section Reference: 10.2

35) On February 1, 2017, Hillary Company filed a petition for reorganization under the bankruptcy statutes. The court approved the plan on September 1, 2017, including the following provisions:

1. Accrued expenses of $21,930, representing priority items, are to be paid in full.

2. Hillary Company is to exchange accounts receivable in the face amount of $138,000 and an allowance for uncollectible accounts of $29,200 for the full settlement of $198,600 owed on open account to one of its major unsecured creditors. The estimated fair value of the receivables is $104,000.

3. Unsecured creditors of open accounts amounting to $91,600 and paid 40 cents on the dollar in full settlement.

4. Hillary Company’s only other major unsecured creditor agreed to a five-year extension of the $500,000 principal owed him on a 10% note payable. Accrued interest on the note on September 1, 2017, amounts to $45,000, one-third of which is to be paid in cash and the remainder canceled. In addition, no interest is to be charged during the remaining five years to maturity of the note.

Required:

Prepare journal entries on the books of Hillary Company to give effect to the preceding provisions.

1. Accrued Expenses 21,930

Cash 21,930

2. Allowance for Uncollectible Accounts 29,200

Loss on Transfer of Assets 4,800

Accounts Receivable ($138,000 - $104,000) 34,000

Accounts Payable 198,600

Accounts Receivable 104,000

Gain on Restructuring of Debt ($198,600 - $104,000) 94,600

3. Accounts Payable 91,600

Cash ($91,600 × 0.40) 36,640

Gain on Restructuring of Debt 54,960

4. Notes Payable 500,000

Accrued Interest Payable 45,000

Cash 15,000

Restructured Debt 500,000

Gain on Restructuring of Debt ($545,000 - $515,000) 30,000

Question Title: Test Bank (Problem) Question 10-8

Difficulty: Hard

Learning Objective: 4 Distinguish among fully secured, partially secured, and unsecured claims of creditors., 6 Describe the ways debt may be restructured in a reorganization.

Section Reference: 10.2