Chapter 13

A company is using the liquidation basis of accounting and is currently producing a statement of net assets. The company has a building with a cost of $2.3 million but also accumulated depreciation of $900,000. The building has a fair value of $1.7 million although the company only expects to get $1.6 million in a quick sale. Sales costs are expected to be $100,000. What is reported for this building on a statement of net assets?

$1,500,000

A company is currently preparing financial statements on the liquidation basis of accounting. The company has a note payable for $300,000 but expects that the eventual payment will be between $50,000 and $90,000. What should be reported for this liability in a statement of net assets?

$300,000

A company is emerging from bankruptcy as a reorganized entity. On that day, the company has one asset--a building--with a cost of $2.2 million, a net book value of $3 million and a fair value of $3.6 million.The company as a whole has a reorganization value of $4 million. If fresh start accounting is applied, what amount should be reported as Goodwill?

$400,000

The Ames Corporation is going through a legal bankruptcy process. The company lost $3 million in the sale of a division that was made to help downsize the company. The company also incurred $2 million in professional fees as a result of this bankruptcy. How much should the company report on its income statement as reorganization items?

$5 million

A company has filed for Chapter 11 bankruptcy and is currently going through reorganization. The company is currently preparing a balance sheet. Equipment has a cost of $800,000 along with accumulated depreciation of $280,000 for a net book value of $520,000. This equipment has a fair value of $550,000 but would only net the company $440,000 if sold because of advertising and commissions. What does the company report for this equipment in the balance sheet reporting during reorganization?

$520,000

A company is going through bankruptcy reorganization. The company has a note payable of $8 million that earns interest of 4% per year. All interest had been paid before the day the order for relief was granted. The company expects to pay exactly $5 million on this debt. What amount is reported?

$8 million

A company is being liquidated and has $12,000 in liabilities with priority and $100,000 of unsecured liabilities. The company has $40,000 in free assets. Mr. MaSong is owed $3,000, an unsecured liability. How much should he expect to collect?

$840

The Dylan Company is going through a bankruptcy reorganization. The company owns land with a cost of $300,000 and an expected net realizable value of $120,000. The company also has a building with a cost of $800,000, a net book value of $600,000, and an expected net realizable value of $470,000. What is the total amount shown as assets in its balance sheet?

$900,000

A company is in bankruptcy and will be liquidated. List the following unsecured debts in order of their legal priority. Instructions

1. Claims for administrative expenses 2. Employee wages of $6,000 owed to each of several employees 3. Claims for the return of deposits of up to $1,000 per customer. 4. Government claims for unpaid taxes

In preparing a statement of financial affairs, in what order are the liabilities listed? Instructions

1. Liabilities with priority 2. Fully secured liabilities 3. Partially secured liabilities 4. Unsecured liabilities

Ace Company has been having cash flow problems and has started waiting several weeks before making payments on its debts. In fact, the company has a policy whereby all debts are paid 24 days after they come due. This delay has helped alleviate some of the cash problems. Which of the following is true?

Ace is not insolvent at this point in time.

A company is exiting from bankruptcy reorganization and is now producing a balance sheet using fresh start accounting. The company has a number of liabilities including bonds and notes payable, deferred income tax liabilities, pension liabilities, and lease liabilities. Which of the following is true?

All liabilities except for deferred income tax liabilities are reported at the present value of the future cash payments.

A company is preparing a statement of financial affairs and owes each of its five employees $3,000 for work during the previous 4 months. How is this debt reported?

As a liability with priority

A company is going through a bankruptcy reorganization and incurs professional fees (attorneys, accountants, and other experts) of $6 million. How should this cost be reported by the company?

As an immediate expense

The Krawick Corporation is currently going through a bankruptcy reorganization. On the date that the order for relief was granted, the company had $3 million in unsecured debts. On a balance sheet at this time, how are these liabilities reported?

As liabilities subject to compromise

Which of the following is the most likely reason that bankruptcy laws have been created in the United States?

Bankruptcy laws are written to help ensure that all involved parties are treated fairly.

A company is in liquidation and has cash of $300,000 as well as liabilities with priority of $100,000 and other unsecured debts of $400,000. A creditor who has an unsecured accounts receivable of $30,000 from this company can expect to collect .

Blank 1: $15,000, 50%, Half, or 15,000

The Shayung Company has filed a petition for bankruptcy petition. It has been accepted and an order for relief has been granted. Despite the insolvency of the company, the board of directors has been allowed to remain in charge of the company. In this situation, the board is known as the .

Blank 1: Debtor Blank 2: In Blank 3: Possession

The D'Wayne Corporation is having severe financial difficulties and plans to file for bankruptcy protection. Before that action is taken, the board of directors and the creditors meet and agree that certain assets will be sold so that 60 percent of all unsecured debts can be paid. This process is known as a .

Blank 1: Prepackaged or Prearranged Blank 2: Bankruptcy

The board of directors of the Lansalott Corporation is in bankruptcy and has created a plan for reorganization. The plan is not accepted by a sufficient number of creditors. However, the bankruptcy court feels the plan is fair and has a good chance for success and accepts the plan despite the vote of the creditors. This process is known as a .

Blank 1: cram Blank 2: down

Which of the following are primary goals of the bankruptcy laws in the United States?I - The fair distribution of assets to creditors.II - The discharge of an honest debtor from debt.

Both I and II

A company is currently in bankruptcy and has just enough money to pay one of the following claims. Which should be paid first?

Claims for administrative expenses

Which of the following conditions or events is least likely to signal that a company will be unable to meet its obligations as they come due?

Debt refinancing

Which of the following unsecured debts has the highest claim in a bankruptcy case?

Employee claims for wages within certain limitations

A company is said to be insolvent when its debts are more than 30 days overdue. Is this true or false?

False

A company is said to be insolvent. That means that its liabilities are larger than its assets. Is this true or false?

False

A liquidation and a reorganization are basically the same thing. Is this true or false?

False

The Alexander Company files for bankruptcy protection. Each of the company's 14 employees is owed $2,000 in wages that were earned over the previous 60 days. Because the employees are not traditional creditors (like a bank or other lender), those wages must be paid. Is this true or false?

False

The board of directors of Balwood Corporation has created a bankruptcy reorganization plan and presented it to its stockholders. For acceptance, at least 50 percent of the shares being voted must agree to the plan. Is this true or false?

False

True or false: A company is having economic problems and substantial doubt exists as to whether the company can continue as a going concern. At a minimum, management must ensure that plans are in place to address the problems and it is probable that these plans can be implemented within the next year.

False

True or false: A company is having trouble paying its debts as they come due and will likely file for bankruptcy in the near future. Any goodwill that the company is reporting should be written down as an impairment loss.

False

True or false: A company prepares a statement of net assets in liquidation using the liquidation basis. At the end of the current year, the company expects to pay a salvage company $120,000 to sell all of its remaining assets. This event will occur in the following year. These costs will not be recorded until incurred in the following year.

False

True or false: A voluntary bankruptcy is one that is created by the bankruptcy court and is completely independent of both the debtor and creditors.

False

True or false: Ace Company has a note coming due in 8 months and substantial doubt has been raised as to the payment of this liability and whether the company can continue as a going concern. If company officials get a signed agreement from another bank to provide the cash needed to pay this note when it comes due, no disclosure of the substantial doubt is required.

False

True or false: Ace Company is preparing financial statements for December 31, Year One, and the year ending on that date. Substantial doubt has been raised as to whether Ace Company can continue to operate as a going concern until December 31, Year Two. The management does have a plan in place to resolve the financial crisis if it should take place. If needed, the plan will be implemented and it will resolve the financial difficulties. Thus, the company is not required to disclose information about the problem in the Year One financial statements.

False

True or false: An order for relief is granted to a company on December 1, Year One. The company is being reorganized. The company has a $10 million note payable outstanding on that date with a 12% annual interest rate. Interest expense of $100,000 should be reported for the month of December.

False

True or false: Ms. Smith paid $1,000 to Ace Company as a deposit on a new room of furniture for her living room. Shortly, thereafter, Ace goes bankrupt. Ms. Smith files a claim for return of this money. Her claim has priority over small amounts owed to employees as salary.

False

True or false: Substantial doubt has been raised about whether the Jones Company can meet its financial obligations over the next few months. Management has a plan that it will implement if the financial problems do occur. This plan will alleviate those problems. Therefore, disclosure of the financial concerns are not necessary.

False

On a statement of financial affairs, the amount of money that is expected to be available to pay unsecured creditors is referred to as .

Free Assets

A company emerges from bankruptcy reorganization and all asset and liability balances are shown at fair value. This type of reporting is known as .

Fresh Start Reporting

The Warren Company is emerging from bankruptcy reorganization. It's reorganization value is $3 million while allowed claims plus debts incurred during bankruptcy are $4 million. The previous owners continue to hold 42% of the company's capital stock as it emerges from bankruptcy. Which of the following is true?

Fresh start accounting is required if a reorganization value is below the debt amount and the previous owners now hold less than 50% of voting stock.

Ace Company owes Hayes Company $4,325. Ace does not pay this debt when it comes due. Which of the following is true?

Hayes can only force Ace into bankruptcy if other creditors (who are owed a sufficient amount) are also willing to sign the involuntary petition.

The Jones Company sells inventory to Wilson Company on June 1 for $40,000. The amount is due on July 1 but is not paid until July 12. On August 15, Wilson declares bankruptcy. How does this effect Jones?

If Wilson was already insolvent on July 12, Jones might well have to return the money to the bankruptcy estate.

An order for relief is granted to Rodbock Co. on January 1, Year 2. On that date, the company has a $5 million note payable paying 6% interest each year and a $10 million note receivable paying 5% interest each year. At the end of Year 2, the reorganization has not been completed. What is the impact on net income for Year 2?

Increase of $500,000

A company becomes insolvent on August 1 but pays a supplier $21,000 on August 24 for some new merchandise that was delivered on August 5. The company files for bankruptcy protection on August 30. What is likely to happen in regard to the August 24 payment.

It is likely that the payment will be voided and the money will have to be returned by the supplier.

The Nesbitt Corporation is going through a Chapter 11 bankruptcy. A reorganization plan has been created. Which of the following is least likely to be included on this reorganization plan?

Plans for expansion

Which of the following is not a signal of an entity's inability to meet debts as they come due?

Negative cash flows from investing activities.

A plan for liquidation has been approved by the court. Does that make liquidation imminent according to the standard set by FASB?

No, the chance that this plan will be blocked or that the entity will return from liquidation also has to be remote.

Ace Company is preparing a balance sheet on December 31, Year One. The company has a very large note payable coming due on March 17, Year Three. A cash forecast indicates that Ace will not be able to make that payment when it comes due. Does substantial doubt that the company will be able to continue as a going concern require disclosure?

No. The debt is not due within one year of the balance sheet date.

A company is going through a bankruptcy reorganization. It has a $100,000 liability (Note A) that is unsecured and, therefore, subject to compromise. The company expects to settle this debt for $64,000. The company also has a $250,000 liability (Note B) that is not subject to compromise because it is secured by a piece of land that can be sold for well above $250,000. Which of the following is not true?

Note A should be reported on the company's balance sheet at $64,000.

Nelson Corporation is emerging from bankruptcy reorganization. The amount a willing buyer would pay for the company's assets after reorganization is known as the

Reorganization Value

A company is going through reorganization and incurs gains, losses, revenues, and expenses directly related to that process. What are they called and where are they reported?

Reorganization items on the income statement

Without bankruptcy laws, what would likely happen when a company did not pay its debts?

Some creditors might receive a higher percentage than other similar creditors with equal standing.

The Ace Company is concerned that it will soon be forced to file for protection under the bankruptcy laws. The independent auditor questions whether substantial doubt exists that the company can continue to exist as a going concern. When is substantial doubt said to exist?

Substantial doubt about being a going concern exists when it is probable a company will fail to meet debts within 1 year of the balance sheet date.

A company has $30,000 to be paid out in a bankruptcy liquidation. The company owes $20,000 to the individuals in charge of administering the company during this period and another $20,000 is owed to the government for unpaid taxes. No other liabilities are present. Which of the following is true?

The administrators get $20,000 and the government gets $10,000

Which of the following is not reported on a statement of realization and liquidation prior to the conclusion of the process?

The amount of free assets expected to be available to pay unsecured creditors.

Which of the following is not an advantage of a prepackaged bankruptcy filing?

The bankruptcy court must accept the plan that is proposed.

The Moran Company filed for Chapter 11 bankruptcy in June but switched to a Chapter 7 bankruptcy in November. What took place?

The bankruptcy started out as a reorganization but eventually became a liquidation.

A company is preparing its financial statements on the liquidation basis of accounting. A statement of net assets is being prepared. The company is reporting its buildings. What amount should be reported?

The cash amount expected to be collected

The Wallston Corporation is currently moving through a Chapter 7 bankruptcy. Which of the following is true?

The company's assets are being liquidated so that debts can be paid.

The Shuping Company files for bankruptcy protection. In accepting this petition, the bankruptcy court appoints an independent trustee to assume control. Which of the following is true?

The court feels that fraud or gross mismanagement has occurred or might occur if the ownership retains control.

You hear that a company is in the midst of a bankruptcy reorganization and that a cram down has been mandated by the bankruptcy court. Which of the following is most likely to have happened?

The court has required the acceptance of a bankruptcy reorganization plan even though one class of creditors has voted against the plan.

Which of the following is a primary goal of the bankruptcy laws in the United States?

The fair distribution of assets to creditors and other interested parties

Le'mon Corporation is going through a bankruptcy reorganization. It has $3 million in liabilities subject to compromise and another $2 million in liabilities that are not subject to compromise. How are these liabilities classified in the company's balance sheet?

The liabilities are reported separately as subject to compromise and not subject to compromise

A reorganization plan has been put forth for the San'Lorento Corporation. All of the stockholders voted in connection with this plan. Sixty percent of the owners (holding 71 percent of the shares) voted to accept the plan. Which of the following is correct?

The plan has been accepted.

The ownership of Zhuang Company has filed a reorganization plan and asked for approval from all of the relevant parties. The plan contains no major changes in company operations. Which of the following is most likely?

The plan is likely to be rejected because no operational changes are anticipated.

For a company emerging from bankruptcy reorganization, which of the following is necessary for a company to be required to use fresh start accounting?

The previous owners must retain less than 50% of the voting stock.

A company exits bankruptcy reorganization and produces a balance sheet that reports a goodwill balance along with other assets and a variety of liabilities. What was the most likely reason for reporting goodwill?

The reorganization value for the entity was greater than the difference in the fair values of the reported assets and the reported liabilities.

The Riesler Corporation owes $300,000 on a note with the bank. Land costing $210,000 but worth $310,000 has been pledged to the bank if payment is not made on a timely basis. The note is not due for another 18 months. Which of the following is true?

This debt is fully secured

Which of the following is a primary purpose for the statement of realization and liquidation?

To show the transactions as they occur in a liquidation and the remaining balances.

The Wilson Company has filed a voluntary petition for bankruptcy. An order for relief has been granted. An advantage of this order for relief is that it halts all legal actions against the debtor. Is this true or false?

True

The creditors of the Merinoe Corporation filed an involuntary petition for bankruptcy. An order for relief has been granted. One of the primary advantages of the order for relief is that the company comes under the authority of the bankruptcy court. Is this true or false?

True

True or false: A company is exiting bankruptcy reorganization and will be applying fresh start accounting. The company has reportable assets with a fair value of $900,000 and reportable liabilities with a fair value of $200,000. The company has calculated its reorganization value as $800,000. The total net assets (assets minus liabilities) reported by this company at that time is $800,000.

True

True or false: A company owes a bank $300,000. A security interest has been signed on a building owned by the debtor. If payment is not made on the bank loan, the bank can force the liquidation of the building with the proceeds going to pay the debt. The building has a net book value of only $190,000 but a fair value of $330,000. The liability is fully secured.

True

True or false: In applying fresh start accounting, all assets and liabilities should be adjusted to fair value.

True

The board of directors of the Moran Company files a petition of bankruptcy with the bankruptcy court. What type of bankruptcy is this?

Voluntary bankruptcy

When should the liquidation basis of accounting first be applied to a company's financial statements?

When liquidation becomes imminent

Disclosure about the substantial doubt that a company can remain a going concern for one year from the date of its financial statements is only required of management in which of the following situations?

Whether management believes plans are in place that will be implemented and will mitigate the situation or not.

Ace Company has been having significant financial difficulties. The company has developed a plan to address these difficulties. Management must make two evaluations. What are they?

Will the plan be implemented and will the plan solve the problem.

Several creditors come together and file a petition to place the Francois Corporation into bankruptcy. This type of bankruptcy is referred to as a(n) petition.

involuntary

Fill in the Blank Question Fill in the blanks to complete the sentence. If a bankruptcy petition is accepted by the bankruptcy court, an is granted to halt all actions against the debtor (insert one word in each of the three blanks). Listen to the complete question

order for relief

The Jackston Corporation is in the process of emerging from bankruptcy reorganization. Other than deferred income taxes, the companies liabilities will be reported at .

present value