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Assuming all of the following expenses have priority, in what order are they prioritized? A) Administrative expenses, employee claims for wages, unpaid taxes, claims for the return of customer deposits. B) Employee claims for wages, unpaid taxes, administrative expenses, claims for the return of customer deposits. C) Unpaid taxes, administrative expenses, employee claims for wages, return of customer deposits. D) Administrative expenses, employee claims for wages, claims for the return of customer deposits, unpaid taxes. E) Unpaid taxes, return of customer deposits, employee claims for wages, administrative expenses.

D) Administrative expenses, employee claims for wages, claims for the return of customer deposits, unpaid taxes.

What are free assets? A) Assets for which net realizable value is greater than historical cost. B) Assets for which no market exists. C) Assets for which replacement cost is greater than historical cost. D) Assets available to be distributed for liabilities with priority and for other unsecured obligations. E) Assets available to be distributed to stockholders.

D) Assets available to be distributed for liabilities with priority and for other unsecured obligations.

How should liabilities (except for deferred income taxes) be reported by a company using fresh start accounting? A) At the undiscounted sum of future cash payments. B) At book value prior to the reorganization. C) As partially secured liabilities. D) At the present value of future cash payments. E) As unsecured liabilities.

D) At the present value of future cash payments.

Where should a company undergoing reorganization report the gains and losses resulting from the reorganization? A) On the statement of retained earnings. B) On the income statement, combined with the gains and losses from operations. C) On the statement of stockholders' equity. D) On the income statement, separate from other gains and losses. E) On the statement of cash flows.

D) On the income statement, separate from other gains and losses.

Which statement is false regarding the acceptance and confirmation of a reorganization plan? A) The plan must be voted on by the creditors and the stockholders of the company. B) A separate vote is required of each class of stockholders. C) Any class of creditors that is not damaged by a reorganization is assumed to have accepted the plan without voting. D) Even if creditors and stockholders approve of the plan, the court can reject the plan. E) Acceptance of the plan requires the approval of two-thirds in number of claims and one-half in dollar amount of creditors that cast votes.

E) Acceptance of the plan requires the approval of two-thirds in number of claims and one-half in dollar amount of creditors that cast votes.

On its balance sheet, a company undergoing reorganization should A) Report its assets at fair value, so that financial statement users can estimate whether creditors' claims will be met. B) Report its assets at net realizable value because there is reason to doubt that the organization is a going concern. C) Report its assets as pledged or free. D) Report its assets at current replacement cost. E) Continue to report its assets at book value.

E) Continue to report its assets at book value.

On a statement of financial affairs, a company's assets should be valued at A) Historical cost. B) Net realizable value, if lower than historical cost. C) Replacement cost. D) Net realizable value, if higher than historical cost. E) Net realizable value, whether higher or lower than historical cost.

E) Net realizable value, whether higher or lower than historical cost.

During a reorganization, cash reserves tend to grow. How should interest earned on these reserves be reported on the financial statements? A) As deferred revenue until the reorganization is complete. B) As a credit directly to retained earnings. C) On the balance sheet as a long-term liability. D) On the income statement, but not classified as a reorganization item. E) On the income statement as a reorganization item.

E) On the income statement as a reorganization item.

Which one of the following is a requirement that must be met before an involuntary bankruptcy petition can be filed when there are at least 12 unsecured creditors? A) The petition must be filed by all creditor(s) to whom the debtor owes at least $15,775. B) The petition must be signed by creditor(s) with unsecured debts of at least $5,000. C) The petition must be signed by a majority of the creditor(s). D) The petition must be signed by creditor(s) to whom the debtor owes more than half of its debts. E) The petition must be signed by at least three creditors with unsecured debts of at least $15,775.

E) The petition must be signed by at least three creditors with unsecured debts of at least $15,775.

How are assets and liabilities valued on a Statement of Financial Affairs? Assets Liabilities A. Fair value Book value B. Book value Amount required for settlement C. Book value Book value D. Fair value Amount required for settlement E. Net realizable value Amount required for settlement

E. Net realizable value Amount required for settlement

In a statement of financial affairs, assets are classified A) According to whether they are pledged as collateral in favor of particular creditors. B) As current or noncurrent. C) As monetary or nonmonetary. D) As operating or non-operating. E) As direct or indirect.

A) According to whether they are pledged as collateral in favor of particular creditors.

Lawyer's fees incurred during a reorganization are accounted for as: A) An expense. B) An intangible asset, Reorganization Cost, which would normally be amortized over a five-year period. C) Additional paid-in capital. D) Retained earnings. E) A prepaid asset until the entity emerges from reorganization.

A) An expense.

A company is insolvent when A) It is unable to pay debts as the obligations come due. B) It is more likely than not that it will not be able to pay debts within a reasonable period of time following the date such obligations become due. C) It is unable to timely remit payment on more than two-thirds of its outstanding obligations measured on a rolling three-month basis. D) It is unable to pay debts within 90 days following the close of the company's reporting year, whether such year is a calendar or fiscal year. E) It is in default on one-third or more of its outstanding debt obligations.

A) It is unable to pay debts as the obligations come due.

All of the following items are liabilities with priority except: A) Obligations arising between the date an order of relief is issued and the date of final realization of assets. B) Employee claims for contributions to benefit plans earned during the 180 days preceding the filing of a petition, limited to $12,850 per individual. C) Government claims for unpaid taxes. D) Claims for the return of deposits made by customers to acquire property or services, which were never delivered or provided by the debtor, limited to $2,850. E) Claims for administrative expenses in preserving and liquidating the company.

A) Obligations arising between the date an order of relief is issued and the date of final realization of assets.

During a reorganization, how should interest expense be reported on the financial statements? A) On the income statement, but not classified as a reorganization item. B) On the income statement as a separate reorganization item. C) On the balance sheet as a prepaid expense. D) As a debit directly to retained earnings. E) On the balance sheet as an intangible asset.

A) On the income statement, but not classified as a reorganization item.

Which of the following is not one of the more common reorganization plan elements? A) Plans for plant expansion. B) Plans for generating additional monetary resources. C) Plans to settle the debts of the company that existed when the order for relief was entered. D) Plans proposing changes in the company's operations. E) Plans for changes in the management of the company.

A) Plans for plant expansion.

Which statement is false regarding a plan for reorganization? A) The plan is the heart of every Chapter 7 bankruptcy. B) The provisions of the plan specify the treatment of all creditors and equity holders upon approval by the Court. C) The plan shapes the financial structure of the entity that emerges. D) The plan may contain numerous provisions as solutions to financial difficulties. E) The plan may contain provisions for changes in the management of the company.

A) The plan is the heart of every Chapter 7 bankruptcy.

For each of the following situations, select the best answer concerning the classification of the liability. (A.) Unsecured without priority (B.) Unsecured with priority (C.) Partially secured (D.) Fully secured ___ 1. Payroll taxes payable. ___ 2. Land and building valued at $427,000 mortgaged by a bank loan in the amount of $517,000. ___ 3. Equipment valued at $73,000 securing a loan to an individual in the amount of $32,100. ___ 4. Salaries payable to employees in the following amounts: $1,250; $1,876; $4,500. ___ 5. Electric bill owed to a local utility. ___ 6. Unpaid defined contribution pension plan payments in the amount of $4,000 (none in excess of $375 per employee.) ___ 7. Obligations arising from the purchase of materials on July 5, 2018. (Bankruptcy petition filed July 14, 2018). ___ 8. Fees charged by bankruptcy trustee. ___ 9. Inventory valued at $61,895 collateralizing a note payable to a bank in the amount of $56,982. ___ 10. Delivery trucks valued at $389,900 securing a lien by General Motors for $400,000.

Answer: (1) B; (2) C; (3) D; (4) B; (5) A; (6) B; (7) A; (8) B; (9) D; (10) C

How should the fresh start reorganization value normally be determined? A) As the sum of current replacement cost of the company's assets. B) As the fair value of assets, debt, and equity, including assets that were not in the previous balance sheet. C) As the sum of the historical book value of net assets, adjusted for assets not previously recorded. D) As the net realizable value of identifiable assets, debt, and equity, only including assets that were in the previous balance sheet. E) As adjusted current cash flows for the entity as it emerges from reorganization.

B) As the fair value of assets, debt, and equity, including assets that were not in the previous balance sheet.

What information is conveyed by the Statement of Realization and Liquidation? A) Account balances reported by the company at the date of the filing of the bankruptcy petition. B) Cash receipts generated by the sale of the debtor's property. C) Write up of assets. D) Recognition of recorded liabilities. E) Assets and liabilities but not stockholders' equity.

B) Cash receipts generated by the sale of the debtor's property.

Which one of the following unsecured liabilities has the highest priority when an insolvent company is about to be liquidated? A) Federal income taxes payable. B) Claims for expenses of administering the bankruptcy. C) Loans made to the company by its stockholders. D) Employees' claims for salaries. E) Bank loans.

B) Claims for expenses of administering the bankruptcy.

Which of the following conditions or events does not signal an entity's inability to pay its debts as they become due? A) Recurring operating losses. B) Drops in the closing stock prices on a recognized stock exchange. C) Working capital deficiencies. D) Loan defaults. E) Negative cash flows from operating activities.

B) Drops in the closing stock prices on a recognized stock exchange.

Which of the following is not a responsibility of the bankruptcy trustee? A) Recover all property belonging to the insolvent company. B) Liquidate common stock of the company. C) Preserve the estate from any further deterioration. D) Make distributions to the proper claimants. E) Void preferences made by the debtor within 90 days prior to the filing of the bankruptcy petition if the company was already insolvent.

B) Liquidate common stock of the company.

On a statement of financial affairs, a specific liability may be classified as A) Current or long-term. B) Secured or unsecured. C) Monetary or nonmonetary. D) Direct or indirect. E) Past due or not yet due.

B) Secured or unsecured.

What is normally required before a reorganization plan can be implemented? A) The plan must be presented by the company and confirmed by the court. B) The plan must be voted on, and accepted separately by, each class of creditors and each class of stockholders, then confirmed by the court. C) The plan must be presented by the company, approved by two-thirds of each class of creditors, and confirmed by the court. D) The plan must be presented by the company, approved by three-fourths of each class of stockholders, and confirmed by the court. E) The plan must be approved by two-thirds of each class of creditors, approved by more than 50% of each class of stockholders, and confirmed by the court.

B) The plan must be voted on, and accepted separately by, each class of creditors and each class of stockholders, then confirmed by the court.

Sparkman Co. filed a bankruptcy petition and liquidated its noncash assets. Sparkman was paying forty cents on the dollar for unsecured claims. Bailey Co. held a mortgage of $150,000 on Sparkman's land which was sold for $110,000. The total amount of payment that Bailey should have received is calculated to be A) $110,000. B) $ 44,000. C) $126,000. D) $150,000. E) $ 60,000.

C) $126,000.

A Chapter 7 bankruptcy is a(n) A) Involuntary reorganization. B) Bankruptcy forced by a company's creditors. C) Liquidation. D) Bankruptcy in which all creditors receive payment in full. E) Voluntary reorganization.

C) Liquidation.

On a statement of financial affairs, a company's liabilities should be valued at A) The present value of future cash flows. B) Net realizable value. C) The amount required for settlement. D) Replacement cost. E) The amount expected to be paid if the company could honor its debts.

C) The amount required for settlement.

The statement of financial affairs should be prepared A) Under the going concern assumption. B) Under the concept of conservatism. C) Under the assumption that liquidation will occur. D) Under the continuity concept. E) Only for a company in Chapter 7 bankruptcy.

C) Under the assumption that liquidation will occur.