CHAPTER 14

BANKRUPTCY: LIQUIDATION AND REORGANIZATION

The title of each problem is followed by the estimated time in minutes required for completion and by a
difficulty rating. The time estimates are applicable for students using the partially filled-in working papers.

Pr. 14–1 Re-Org Company (25 minutes, easy)

Preparation of journal entries to record the reorganization of a business enterprise under
Chapter 11 of the Bankruptcy Code.
Pr. 14–2 Dodge Company (40 minutes, easy)
Prepare a statement of affairs and a working paper to compute percentage of claims to be
received by each group of creditors in a Chapter 7 bankruptcy liquidation.
Pr. 14–3 Robaire Corporation (50 minutes, easy)
Journal entries for one month for a trustee in bankruptcy liquidation. Preparation of statement
of realization and liquidation and a trial balance for trustee.
Pr. 14–4 Javits Corporation (50 minutes, medium)
Preparation of correcting journal entries and a statement of affairs in a bankruptcy liquidation.
Pr. 14–5 Laurel Company (60 minutes, medium)
Preparation of a statement of affairs in a bankruptcy liquidation.
Pr. 14–6 Bilbo Corporation (60 minutes, medium)
Prepare journal entries to give effect to a bankruptcy reorganization plan and a balance sheet at
end of first month of operations following reorganization.

ANSWERS TO REVIEW QUESTIONS

1. The Bankruptcy Code defines insolvency for an entity other than a partnership or a municipality as
a financial state in which the current fair value of the entity's property, exclusive of property
withheld from creditors, is less than the amount of the entity's liabilities.
2. Federal Rules of Bankruptcy Procedure are prescribed by the U.S. Supreme Court for the
various legal practices and procedures under the Bankruptcy Code.
3. The classes of creditors whose claims are dealt with in a bankruptcy liquidation are as follows: (a)
unsecured creditors having priority (as prescribed in the Bankruptcy Code), (b) fully secured
creditors, partially secured creditors, and (c) creditors having unsecured claims without priority.
4. Liquidation under Chapter 7 of the Bankruptcy Code involves the realization (sale) of the assets
of a debtor and the distribution of the cash proceeds to creditors.
5. A debtor’s petition is filed by any debtor except entities such as a railroad, insurance, bank, credit
union, or savings and loan association. The debtor's petition is a plea for the court to grant an order
for relief to the petitioner in bankruptcy. A creditors’ petition is filed by creditors of a debtor other
than those excluded by the Bankruptcy Code. The creditors must claim that the debtor owes debts
aggregating $10,000 or more and is not paying debts as they come due or has a custodian in
possession of the debtor's property.
6. Corporations that are prohibited by the Bankruptcy Code from filing a debtor's bankruptcy petition
include railroad, insurance, credit union, and banking corporations. Savings and loan associations
also are not permitted to file a debtor’s bankruptcy petition.
7. A creditors’ petition for a bankruptcy liquidation may be filed by three or more “outsider”
creditors, having unsecured claims aggregating $10,000 or more, of a debtor with 12 or more
unsecured creditors. If there are fewer than 12 unsecured creditors involved, one or more creditors
having unsecured claims of $10,000 or more in the aggregate may file the petition.

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8. A statement of financial affairs under the Bankruptcy Code is a form filed with a debtor's petition
that contains a series of questions answered by the debtor concerning all aspects of the financial
condition and operations of the debtor.
9. Debts that have priority over other unsecured debts under the provisions of the Bankruptcy Code
are as follows:
(1) Administrative costs
(2) Claims arising after the commencement of bankruptcy proceedings under a creditors' petition
but before appointment of a trustee or order for relief
(3) Claims for wages and like remuneration not in excess of $4,000 per claimant, earned within 90
days of the filing of the petition
(4) Claims for contributions to employee benefit plans, subject to time and amount limitations
(5) Claims by producers of grain against a grain storage facility or by fishermen against a fish
storage or processing facility, not in excess of $4,000 per claimant
(6) Claims for cash deposited for goods or services for the personal, family, or household use of
the depositor, not in excess of $1,800 per claimant
(7) Claims for alimony, maintenance, or support of a spouse, former spouse, or child of the debtor,
under a separation agreement, divorce decree, or court order
(8) Claims of governmental entities for various taxes or duties, subject to varying time limitations
10. Claims for wages, salaries, and similar compensation earned within 90 days of the filing of the
bankruptcy petition and not in excess of $4,000 per claimant, are third in priority among the
unsecured liabilities of the debtor that have priority.
11. A bankruptcy trustee may invalidate a preference under provisions of the Bankruptcy Code and
recover from the creditor the cash or property constituting the preference, for inclusion in the
debtor's estate.
12. A discharge in bankruptcy liquidation proceedings releases the debtor from all unliquidated debts,
except for specific debts enumerated in the Bankruptcy Code.
13. The financial statement known as a statement of affairs shows the financial position of a debtor
enterprise on a quitting-concern or liquidation basis. The statement is used by the bankruptcy
trustee to estimate the cash that will be available to unsecured, nonpriority creditors.
14. Under the accountability method of accounting used by a trustee in a bankruptcy liquidation, the
assets and liabilities of a debtor's estate for which the trustee is responsible are entered in the
accounting records of the trustee at their statement of affairs valuations, with an offset to a
memorandum-type ledger account with a title such as Estate Deficit.
15. An examiner might be appointed for an enterprise that has unsecured liabilities, other than
payables for goods, services, or taxes, exceeding $5 million, for which a trustee was not appointed.
16. The Securities and Exchange Commission may review a plan for reorganization and may be heard
in the bankruptcy court's consideration of the plan.
17. No, all classes of creditors need not accept a reorganization plan. The bankruptcy court may
nonetheless confirm the plan if it is fair and equitable to the nonacceptors.
18. Fresh start reporting for a business enterprise reorganized under Chapter 11 of the Bankruptcy
Code involves valuing the enterprise's assets and liabilities at current fair values and writing off a
retained earnings deficit against additional paid-in capital. Fresh start reporting is appropriate for a
reorganized enterprise whose former stockholders no longer control the enterprise; it is essentially a
new reporting enterprise.

SOLUTIONS TO EXERCISES
Ex. 14–1 1. c 10. c
2. b 11. c
3. c 12. c
4. d 13. b
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 5. d 14. b
6. b 15. b
7. b [$10,000 + ($40,000 x 0.50) = $30,000] 16. d
8. b 17. b
9. a
Ex. 14–2 Estimated amount of assets expected to be received by creditors of Downside Company, Dec.
18, 2006:
Fully secured liabilities (100%) $ 80,000
Unsecured liabilities with priority (100%) 60,000
Partially secured liabilities [$40,000 + ($10,000 x 0.80)] 48,000
Unsecured liabilities without priority ($90,000 x 0.80) 72,000
Total assets ($100,000 + $40,000 + $120,000) $260,000
Ex. 14–3 Computation of total estimated deficiency to unsecured, nonpriority creditors of Foldup
Company, Apr. 30, 2006:
Estimated amount available [$280,000 + ($80,000 – $60,000)] $300,000
Less: Unsecured liabilities with priority 40,000
Estimated amount available to unsecured, nonpriority creditors (72 cents on
the dollar) $260,000
Estimated deficiency to unsecured, nonpriority creditors (28 cents on the
dollar) 100,000
Unsecured, nonpriority creditors [$330,000 + ($80,000 – $50,000)] $360,000
Ex. 14–4 Expected distribution of Windup Company's assets to its creditors, Apr. 30, 2006:
To pay fully secured liabilities (100%) $ 60,000
To pay unsecured liabilities with priority (100%) 30,000
To pay partially secured liabilities [$30,000 + ($10,000 x 0.50)] 35,000
To pay unsecured liabilities without priority ($50,000 x 0.50) 25,000
Total assets ($70,000 + $30,000 + $50,000) $150,000
Ex. 14–5 Amount expected to be paid to each class of creditors of Liquo Company, Dec. 17, 2006:
Total Estimated
Class of creditor claims Computation amount
Fully secured $ 60,000 100% $ 60,000
Unsecured, priority 14,000 100% 14,000
Partially secured 120,000 $104,000 +
($16,000 x 0.65) 114,400
Unsecured, no priority 224,000 65% 145,600
Total assets ($150,000 + $104,000 +
$80,000) $334,000

Ex. 14–6 Computation of cash received by partially secured creditors of Scott Company, June 25, 2006:
Current fair value of assets pledged $60,000
Add: Proportionate recovery on $40,000 ($100,000 –
$60,000 = $40,000) unsecured portion:
Free assets, at current fair value $140,000
Addition from assets pledged for fully secured
liabilities ($190,000 – $130,000) 60,000
Total free assets $200,000
Less: Unsecured liabilities with priority 20,000
Amount available for unsecured liabilities without priority $180,000
Total unsecured liabilities without priority ($260,000 +
$40,000) $300,000
Proportionate recovery percentage ($180,000 ÷ $300,000) 0.60
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 Proportionate recovery on $40,000 ($40,000 x 0.60) 24,000
Cash received by partially secured creditors $84,000
Ex. 14–7 Computation of amount that Stark Company should receive from trustee of Wick Corporation:
Amount owed to Stark Company: Note payable plus accrued interest of $940 $23,940
Less: Current fair value of inventories pledged as collateral on note 19,200
Amount unsecured, payable at approximately $0.78 on the dollar $ 4,740
Estimated amount to be received by Stark Company: Current fair value of
inventories pledged $19,200
Balance ($4,740 x 0.78) 3,697
Total amount that Stark Company should receive $22,897
Ex. 14–8 Computation of cash available to pay Decker Company’s unsecured liabilities without priority,
Aug. 15, 2006:
Free assets, at current fair value $160,000
Addition from assets pledged for fully secured liabilities ($185,000 –
$130,000) 55,000
Subtotal $215,000
Less: Unsecured liabilities with priority 35,000
Cash available for unsecured liabilities without priority $180,000

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Ex. 14–9 Computation of estimated amount expected to be paid to each class of creditors of Kent
Corporation:
Estimated
Current amount
fair value available
Assets pledged for fully secured liabilities $75,000
Less: Fully secured liabilities 30,000 $ 45,000
Free assets $40,000 40,000
Total amount available $ 85,000
Less: Unsecured liabilities with priority 7,000
Amount available for unsecured, nonpriority creditors $ 78,000
Partially secured liabilities $60,000
Less: Assets pledged for partially secured liabilities 52,000
Amount unsecured $ 8,000
Unsecured liabilities without priority 112,000
Total unsecured liabilities $120,000

Percentage available to unsecured creditors: $78,000 ÷

$120,000 = 65%

Creditors will receive payment as follows:

Unsecured creditors with priority, 100% $ 7,000
Fully secured creditors, 100% 30,000
Partially secured creditors [$52,000 + ($8,000 x 0.65)] 57,200
Unsecured creditors without priority ($112,000 x 0.65) 72,800
Total to be received by creditors ($75,000 + $52,000 + $167,000
$40,000)
Ex. 14–10 Assets side of statement of affairs for Progress Book Company, May 31, 2006:
Current Estimated Loss or
Carrying fair amount (gain) on
amount Assets value available realization
a. Assets pledged for fully secured
liabilities:
$70,000 Furniture and fixtures $60,500 $9,500
Less: Fully secured liabilities (contra) 42,800 $17,700
b. Assets pledged for partially secured
liabilities:
$15,000 Book manuscripts owned (deducted
contra) $7,200 $7,800
c. Free Assets:
$37,500 Books in process:
Estimated sales value
on completion $60,000
Less: Costs to complete 14,200 $45,800 $45,800 $(8,300)

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Ex. 14–11 Journal entries for Edward Ross, trustee in bankruptcy for Winslow Company:
2006
May 2 Cash 10,000
Estate Deficit 500
Finished Goods Inventory 10,500
3 Wages Payable 8,000
Cash 8,000
4 Cash 6,000
Estate Deficit 200
Trade Accounts Receivable 6,200
7 Estimated Administrative Costs 500
Cash 500
Ex. 14–12 REED COMPANY, IN BANKRUPTCY
Selma Ross, Trustee
Statement of Realization and Liquidation
For Month of January, 2006

Estate deficit, Dec. 31, 2005 ($35,150 – $30,000) $5,150

Assets realized:

Current fair
value, Dec. 31, Realization Loss or
2005 proceeds (gain)
Trade accounts receivable $ 7,500 $6,500 $1,000
Inventories 12,500 14,500 (2,000)
Totals $20,000 $21,000 (1,000)
Liabilities liquidated at Dec. 31, 2005, carrying amounts:
Trade accounts payable $6,000
Administrative costs paid $2,950
Liabilities assumed, accrued interest payable 50 3,000
Estate deficit, Jan. 31, 2006 ($29,200 – $10,000 – $12,050* cash) $7,150
*$21,000 – $8,950 = $12,050
Ex. 14–13 Journal entries for Kolb Company, July 27, 2006:
Common Stock, no-par 600,000
Common Stock, $5 par (50,000 x $5) 250,000
Paid-in Capital in Excess of Par 350,000
Trade Accounts Payable 70,000
Common Stock, $5 par (10,000 x $5) 50,000
Paid-in Capital in Excess of Par 20,000
Trade Accounts Payable 60,000
Cash ($60,000 x 0.80) 48,000
Gain from Discharge of Indebtedness in Bankruptcy 12,000

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Ex. 14–14 Journal entries for Hayward Company, Jan. 20, 2006:
(1) Common Stock, $100 par 100,000
Common Stock, $5 par 5,000
Paid-in Capital in Excess of Par 95,000
(2) Notes Payable 2,500
Interest Payable 500
Common Stock, $5 par (200 x $5) 1,000
Paid-in Capital in Excess of Par (200 x $5) 1,000
Gain from Discharge of Indebtedness in Bankruptcy 1,000
(3) Trade Accounts Payable 10,000
Cash 8,000
Gain from Discharge of Indebtedness in Bankruptcy 2,000

CASES
Case 14–1 The recognition of an intangible asset “Reorganization value in excess of amounts allocable to
identifiable assets,” sanctioned by paragraph 38 of Statement of Position 90-7, appears to be
inconsistent with the definition of assets in Statement of Financial Accounting Concepts No.
6, paragraph 25. The existence of probable future economic benefits related to the
reorganization value is questionable, given that the amount recognized for the so-called
intangible asset is a residual obtained by subtracting the current fair values assigned to
identifiable tangible and intangible assets of the reorganized enterprise from its reorganization
value. That value is defined in paragraph 9 of Statement of Position 90-7 as “fair value of the
entity before considering liabilities and approximates the amount a willing buyer would pay for
the assets of the entity immediately after the restructuring.” One would deduce that the assets
referred to in the foregoing definition are identifiable assets, not speculative ones. To treat
reorganization value essentially the same as acquired goodwill appears to violate the spirit, if
not the letter, of FASB Statement No. 142, which requires in paragraph 10 that internally
developed unidentifiable assets' costs should be recognized as expenses when incurred. To
borrow a portion of the dissent of Robert T. Sprouse to the issuance of FASB Statement No.
87, “ . . . recognition practices [for reorganization value] can be neither reconciled with the
[Financial Accounting Standards] Board’s conceptual framework nor readily understood by
financial statement users.”
Case 14–2 a. The $25,000 income tax assessment applicable to 2005 generally would be accounted for
as a prior period adjustment (correction of an error of a prior period) and debited to the
Retained Earnings ledger account. However, the general rule applicable in a reorganization
requires that, when material items that should have been adjusted in the restatement of
assets and liabilities are found to have been accounted for incorrectly, any corrections
subsequently required should be made to additional paid-in capital created in the
reorganization. Such corrections should not be considered a part of the earnings
accumulated after the reorganization. In "fresh start" accounting for a reorganization, asset
carrying amounts should be restated in conformity with estimates of current fair value.
Such restatements should include write-ups of values, when justified, as well as write-
downs. The income tax assessment applicable to 2005 has no relationship to the earnings
of the past six months; the assessment should have been estimated at the time of the
reorganization.
b. Because the disposal of the equipment took place within six months of the date of the
reorganization, the appraised value on the date of the reorganization seems to have been in
error. The gain of $48,000 should have been credited to an additional paid-in capital ledger
account, not to the Retained Earnings account.

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 c. The fire loss of $15,000 should be displayed in the income statement, not debited directly
to the Retained Earnings ledger account. The relevant issue, however, is that the loss
should not be debited to a paid-in capital account.
d. A declaration of a cash dividend is a proper debit to the Retained Earnings ledger account
if the dividend does not exceed the accumulated earnings since the date of reorganization.
e. Net income earned subsequent to a reorganization is credited to the Retained Earnings
ledger account; therefore, this item was recorded correctly.
Case 14–3 a. Assets pledged for partially secured liabilities are displayed at both carrying amount and
current fair value on the assets side of the statement of affairs. In addition, the current fair
value of the assets is deducted from the related partially secured liabilities on the liabilities
side of the statement.
b. Unsecured liabilities with priority are displayed at carrying amount and totaled on the
liabilities side of the statement of affairs. The total of the liabilities is deducted from the
total of the "Estimated amount available" column on the assets side of the statement.
c. Stockholders’ equity is a balancing amount in the “Carrying amount” column of the
liabilities and stockholders’ equity side of the statement of affairs.

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25 Minutes, Easy
Re-Org Company Pr. 14–1
Re-Org Company
Journal Entries

20 06
July 24 Costs of Bankruptcy Proceedings 5 0 0 0 0
Cash with Escrow Agent 5 0 0 0 0

24 Common Stock, no par 5 8 0 0 0 0

Common Stock, $1 par (60,000 x $1) 6 0 0 0 0
Paid-in Capital in Excess of Par 5 2 0 0 0 0

24 10% Note Payable 1 2 0 0 0 0

Interest Payable ($120,000 x 0.10 x 3/12) 3 0 0 0
12% Note Payable 1 2 3 0 0 0

24 Trade Accounts Payable 1 0 0 0 0 0

Cash ($100,000 x 0.80) 8 0 0 0 0
Gain from Discharge of Indebtedness in
Bankruptcy 2 0 0 0 0

24 Paid-in Capital in Excess of Par 2 9 0 0 0 0

Gain from Discharge of Indebtedness in Bankruptcy 2 0 0 0 0
Retained Earnings 2 6 0 0 0 0
Costs of Bankruptcy Proceedings 5 0 0 0 0

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40 Minutes, Easy
Dodge Company Pr. 14–2
a. Dodge Company
Statement of Affairs
October 31, 2006
Estimated Loss or
Carrying Current fair amount (gain) on Carrying Amount
amount Assets value available realization amount Liabilities & Stockholders’ Equity unsecured
Assets pledged for fully Unsecured liabilities with priority:
secured liabilities: $ 5 8 0 0 Wages payable $ 5 8 0 0
$ 1 0 7 0 0 0 Plant assets $ 6 7 4 0 0 $ 3 9 6 0 0 1 2 0 0 Property taxes payable 1 2 0 0
Less: Fully secured Total (deducted contra) $ 7 0 0 0
liabilities (contra) 5 0 4 0 0 $ 1 7 0 0 0
Fully secured liabilities:
Assets pledged for partially Mortgage note payable; includes interest of
secured liabilities: 5 0 4 0 0 $400 (deducted contra) $ 5 0 4 0 0
3 9 0 0 0 Inventories (deducted
contra) $ 1 8 0 0 0 2 1 0 0 0 Partially secured liabilities:
2 1 0 0 0 Notes payable $ 2 1 0 0 0
Free assets: Less: Net realizable value of inventories
4 0 0 0 Cash $ 4 0 0 0 4 0 0 0 pledged as collateral (contra) 1 8 0 0 0 $ 3 0 0 0
4 6 0 0 0 Trade accounts receivable 4 6 0 0 0 4 6 0 0 0
2 0 0 0 Supplies 1 5 0 0 1 5 0 0 5 0 0 Unsecured liabilities without priority:
Total estimated 6 0 0 0 0 Trade accounts payable 6 0 0 0 0
amount available $ 6 8 5 0 0 $ 6 1 1 0 0 1 9 0 0 0 Notes payable 1 9 0 0 0

Less: Unsecured liabilities

W ith priority (contra) 7 0 0 0
Estimated amount available for
unsecured, nonpriority creditors
($0.75 on the dollar) $ 6 1 5 0 0

Estimated deficiency to unsecured,

non priority creditors ($0.25 on the
dollar) 2 0 5 0 0 4 0 6 0 0 Stockholders’ equity
$ 1 9 8 0 0 0 $ 8 2 0 0 0 $ 1 9 8 0 0 0 $ 8 2 0 0 0

b. Dodge Company
Estimated Percentage of Claims to be Paid
October 31, 2006
Amount Amount Percentage
Creditor group of claim to be paid to be paid
Unsecured liabilities with priority $ 7 0 0 0 $ 7 0 0 0 1 0 0 . 0
Fully secured liabilities 5 0 4 0 0 5 0 4 0 0 1 0 0 . 0
Partially secured liabilities 2 1 0 0 0 2 0 2 5 0 * 9 6 . 4
Unsecured liabilities without priority 7 9 0 0 0 5 9 2 5 0 7 5 . 0

*18,000 + ($3,000 x 0.75) = $20,250

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50 Minutes, Easy
Robaire Corporation Pr. 14–3
a. Robaire Corporation, in Bankruptcy
Charles Stern, Trustee
Journal Entries
20 07
Jan 2 Cash 7 0 0
Trade Accounts Receivable (including assigned
accounts of $10,000) 2 0 4 5 0
Inventories 1 8 9 5 0
Public Service Company Bonds 9 0 0
Land 2 0 0 0 0
Buildings 3 0 0 0 0
Machinery and Equipment 1 8 0 0 0
Estate Deficit 1 0 0 0 0
Wages Payable 1 5 0 0
FICA and Income Taxes Withheld and Accrued 8 0 0
Estimated Administrative Costs 3 2 0 0
Mortgage Note Payable 4 2 0 0 0
Interest Payable 5 0 0
Notes Payable—Bank 2 5 0 0 0
Notes Payable—Suppliers 2 0 0 0 0
Trade Accounts Payable 2 6 0 0 0
To record current fair values of assets and liabilities
of Robaire Corporation, in bankruptcy (filed
Jan. 2, 2007).

7 Cash 5 2 0 0 0
Land 2 0 0 0 0
Buildings 3 0 0 0 0
Estate Deficit 2 0 0 0
To record realization of land and buildings for $2,000
in excess of the current fair value on date bankruptcy
petition filed.

7 Mortgage Note Payable 4 2 0 0 0

Interest Payable 5 0 0
Estate Deficit 5 0
Cash 4 2 5 5 0
To record payment of principal and interest on
mortgage note, including $50 interest accrued in
January.

10 Wages Payable 1 5 0 0
FICA and Income Taxes Withheld and Accrued 8 0 0
Estimated Administrative costs 6 0 0
Inventories 4 0 0
Cash 3 3 0 0
To record payment of unsecured liabilities with priority
and costs to complete inventories.

(Continued on page 416.)

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Robaire Corporation (continued) Pr. 14–3
Robaire Corporation, in Bankruptcy
Charles Stern, Trustee
Journal Entries (concluded)
20 07
Jan 31 Cash 3 6 4 2 0
Estate Deficit 1 3 3 0
Trade Accounts Receivable 1 7 5 0 0
Inventories 1 9 3 5 0
Public Service Company Bonds 9 0 0
To record collections of accounts receivable and
realization of assets at net loss of $1,330 ($1,350 –
$20 = $1,330).

31 Estimated Administrative Costs 1 2 5 0

Notes Payable—Bank ($10,000 + $7,500) 1 7 5 0 0
Notes Payable—Suppliers 1 0 0 0 0
Trade Accounts Payable 1 3 0 0 0
Cash 4 1 7 5 0
To record cash payments, including $30,500 ($0.50 on
the dollar) to unsecured creditors without priority.

b. Robaire Corporation, in Bankruptcy

Charles Stern, Trustee
Statement of Realization and Liquidation
For Month Ended January 31, 2007
Estate deficit, Jan. 2, 2007 $ 1 0 0 0 0
Assets realized:

Current Fair
Value, Jan. 2, Realization Loss or
2007 Proceeds (Gain)
Land and buildings $50,000 $52,000 $ ( 2 0 0 0 )
Trade accounts
receivable 17,500 17,500
Inventories 19,350* 18,000 1 3 5 0
Public Service
Company bonds 900 920 ( 2 0 )
Totals $87,750 $88,420 ( 6 7 0 )

Liabilities liquidated:
Wages payable $ 1 5 0 0
FICA and income taxes withheld and accrued 8 0 0
Estimated administrative costs 1 8 5 0
Mortgage note payable (including accrued
interest of $550) 4 2 5 5 0 5 0
Notes payable—banks 1 7 5 0 0
Notes payable—suppliers 1 0 0 0 0
Trade accounts payable 1 3 0 0 0
Total $ 8 7 2 0 0

Estate deficit, Jan. 31, 2007 $ 9 3 8 0

*$18,950 + $400 = $19,350

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Robaire Corporation (concluded) Pr. 14–3
c. Robaire Corporation, in Bankruptcy
Charles Stern, Trustee
Trial Balance, January 31, 2007
Debit Credit
Cash ($700 + $88,420 – $87,600) $ 1 5 2 0
Trade accounts receivable 2 9 5 0
Machinery and equipment 1 8 0 0 0
Estate deficit 9 3 8 0
Estimated administrative costs $ 1 3 5 0
Notes payable—bank 7 5 0 0
Notes payable—suppliers 1 0 0 0 0
Trade accounts payable 1 3 0 0 0
Totals $ 3 1 8 5 0 $ 3 1 8 5 0

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50 Minutes, Medium
Javits Corporation Pr. 14–4
a. Javits Corporation
Correcting Journal Entries
July 10, 2006
Retained Earnings 5 0 0
Cash 5 0 0
To remove expended travel advance from cash.

Interest Receivable 2 0 0
Retained Earnings 2 0 0
To accrue interest on U.S. government bonds.

Trade Accounts Payable 1 5 0 0 0

Retained Earnings 5 0 0
FICA and Income Taxes Payable 1 5 5 0 0
To remove FICA and income taxes payable from
accounts payable and to accrue unrecorded FICA
taxes.

Retained Earnings 2 4 0 0
Interest Payable 2 4 0 0
To accrue interest on mortgage note payable.

Retained Earnings 5 0 0 0 0
Estimated Liability under Pending Litigation 5 0 0 0 0
To record loss contingency that is probable.

Retained Earnings 5 0 0 0
Trade Accounts Payable 5 0 0 0
To record liability for fee for Apr. 30, 2006, annual
audit.

Retained Earnings 1 0 0 0
Short-term Investments ($10,000 – $9,000) 1 0 0 0
To write down short-term investments in Owens
Company common stock to fair value of $9,000 (500 x
$18 = $9,000) from cost of $10,000 ($20,000 – $10,000
= $10,000).

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Javits Corporation Pr. 14–4
b. Javits Corporation
Statement of Affairs
July 10, 2006
Estimated Loss or
Carrying Current fair amount (gain) on Carrying Amount
amount Assets value available realization amount Liabilities & Stockholders’ Equity unsecured
Assets pledged for fully secured Unsecured liabilities with priority:
liabilities: Estimated liquidation costs $ 10 0 0 0
Trade accounts Liquidation accounting fee 1 0 0 0
$ 4 0 0 0 0 receivable $ 4 0 0 0 0 $ 15000 Wages payable 15 0 0 0
1 3 0 0 0 Land 2 5 0 0 0 $ ( 12000) 15500 FICA and income taxes payable 15 5 0 0
9 0 0 0 0 Buildings 11 0 0 0 0 ( 20000) Total (deducted contra) $ 41 5 0 0
12 0 0 0 0 Machinery 6 5 0 0 0 55000
Total $ 24 0 0 0 0 Fully secured liabilities:
Less: Fully secured liabilities 130000 Mortgage notes payable $ 130 0 0 0
(contra) 162400 $ 77600 2400 Interest payable 2 4 0 0
30000 Notes payable 30 0 0 0
Assets pledged for Total (deducted contra) $ 162 4 0 0
partially secured
liabilities:
Short-term investments, including 20000 Partially secured liabilities:
interest of $200 (deducted Notes payable $ 20000
19200 contra) $ 19200 Less: Current fair value of pledged
short-term investments 19200 $ 800
Free assets:
11500 Cash $ 11500 11500 Unsecured liabilities without priority
Trade accounts 84200 Trade accounts payable 84200
receivable (before credit 85000 Notes payable 85000
55000 balances of $5,000) 55000 55000 5000 Credit balances in trade accounts 5000
receivable
60000 Finished goods inventory 50000 50000 10000 50000 Estimated liability under pending litigation 50000
40000 Material inventory 59900
Less: Cost to complete ( 10000) 49900 ( 9900 )
5000 Short-term prepayments 5000
20000 Goodwill 20000

Total estimated amount

available $ 244000 $ 48100
Less: Unsecured liabilities
with priority (contra) 41500
Estimated amount available
for unsecured, nonpriority
creditors ($0.90 on the dollar) $ 202500
Estimated deficiency to
unsecured, nonpriority creditors
( ($0.10 on the dollar) 22500 36600 Stockholders’ equity
$ 473700 $ 225000 $ 473700 $ 225000

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Solutions Manual, Chapter 14 163
40 Minutes, Medium
Laurel Company Pr. 14–5
Laurel Company
Statement of Affairs
June 30, 2006
Estimated Loss or
Carrying Current fair amount (gain) on Carrying Amount
amount Assets value available realization amount Liabilities & Stockholders’ Equity unsecured
Assets pledged for fully Unsecured liabilities with priority:
secured liabilities: Estimated liquidation costs $ 4 5 0 0
$ 2 5 5 0 0 Notes receivable, including $ 1 4 0 0 Wages payable 1 4 0 0
interest of $500 $ 2 5 5 0 0 4 3 0 FICA and income taxes withheld & accrued 4 3 0
Less: fully secured Total (deducted contra) $ 6 3 3 0
liability (contra 1 8 6 0 0 $ 6 9 0 0
1 0 0 0 0 Land $ 1 1 0 0 0 $ ( 1 0 0 0 ) Fully secured liabilities:
3 5 0 0 0 Building 3 8 5 0 0 ( 3 5 0 0 ) Notes payable to City Bank, including
Total $ 4 9 5 0 0 1 8 6 0 0 interest of $600 (deducted contra) $ 1 8 6 0 0
Less: Fully secured Mortgage bonds payable, including interest
liability (contra) 3 3 8 2 0 1 5 6 8 0 3 3 8 2 0 of $1,820 (deducted contra) $ 3 3 8 2 0

Assets pledged for Partially secured liabilities:

partially secured Notes payable—Municipal Trust Company,
liabilities: 6 1 8 0 including interest of $180 $ 6 1 8 0
3 2 0 0 Trade accounts receivable Less: Assigned accounts receivable (contra) 3 2 0 0 $ 2 9 8 0
(deducted contra) $ 3 2 0 0
Unsecured liabilities without priority:
Free assets: Notes payable to vendors, including interest
1 4 1 3 5 Cash $ 1 4 1 3 5 1 4 1 3 5 2 4 5 0 0 of $500 2 4 5 0 0
4 1 1 5 Notes receivable, 8 0 5 2 0 Trade accounts payable 8 0 5 2 0
including $115 interest 3 1 1 5 3 1 1 5 1 0 0 0
2 0 5 0 0 Trade accounts
receivable $20,500
Less: Uncollectible
portion of Boren
Company account 4,200 1 6 3 0 0 1 6 3 0 0 4 2 0 0

4 8 0 0 0 Inventories 9 5 0 0 9 5 0 0 3 8 5 0 0
1 4 0 0 0 Machinery and
equipment 6 6 0 0 6 6 0 0 7 4 0 0
1 1 5 0 0 Furniture and fixtures 1 0 5 0 0
Less: Refinishing costs ( 8 0 0 ) 9 7 0 0 1 8 0 0
9 6 0 0 Goodwill 9 6 0 0
Total estimated amount $ 8 1 9 3 0 $ 5 8 0 0 0
Less: Unsecured liabilities
with priority (contra) 6 3 3 0
Estimated amount available for
unsecured, nonpriority creditors
(0.70 on the dollar) $ 7 5 6 0 0
Estimated deficiency to
unsecured, nonpriority
creditors ($0.30 on the dollar) 3 2 4 0 0 3 0 1 0 0 Stockholders’ equity
$ 1 9 5 5 5 0 $ 1 0 8 0 0 0 $ 1 9 5 5 5 0 $ 1 0 8 0 0 0

The McGraw-Hill Companies, Inc., 2006

164 Modern Advanced Accounting, 10/e
60 Minutes, Medium
Bilbo Corporation Pr. 14–6
a. Bilbo Corporation
Journal Entries
April 1, 2006
(1) 7% Cumulative Preferred Stock 3 0 0 0 0 0
Paid-in Capital in Excess of Par: Preferred Stock 2 2 4 7 0
Retained Earnings ($105,000 – $22,470 + $15,000) 9 7 5 3 0
15% Bonds Payable 3 0 0 0 0 0
15% Preferred Stock (12,000 x $10) 1 2 0 0 0 0
To record the issuance of 15% bonds in exchange for
old 7% preferred stock, and the issuance of new 15%
preferred stock in settlement of $105,000 dividends
in arrears on old 7% preferred stock.

(2) Common Stock—no par 6 4 8 4 3 0

Common Stock$50 par 4 5 0 0 0 0
Paid-in Capital in Excess of Par: Common
Stock 1 9 8 4 3 0
To restate common stock to a par of $50 a share.

(3) Retained Earnings 1 6 3 6 6 0

Goodwill 5 0 0 0 0
Plant Assets 1 7 8 0 0
Accumulated Depreciation 8 5 4 0 0
Other Current Assets 1 0 4 6 0
To record writedown of assets.

Paid-in Capital in Excess of Par: Common Stock 8 5 1 2 0

Retained Earnings 8 5 1 2 0
To close debit balance of Retained Earnings ledger
account to Paid-in Capital in Excess of Par: Common
Stock account in order to leave zero balance in the
Retained Earnings account.

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Solutions Manual, Chapter 14 165
Bilbo Corporation (concluded) Pr. 14–6
b. Bilbo Corporation
Journal Entry (not required)
April 30, 2006
Cash 1 1 9 7 0
Other Current Assets 1 8 7 0 0
Current Liabilities 7 0 5 0
Accumulated Depreciation 8 6 2 0
Retained Earnings 1 5 0 0 0
To record changes in ledger account balances during
April, 2006.

Bilbo Corporation
Balance Sheet
April 30, 2006
Assets
Cash $ 4 1 9 7 0
Other current assets 2 6 1 1 3 0
Plant assets $1 4 4 0 4 5 0
Less: Accumulated depreciation 6 0 6 0 2 0 8 3 4 4 3 0
Total assets $1 1 3 7 5 3 0

Liabilities & Stockholders’ Equity

Current liabilities $ 1 3 9 2 2 0
15% bonds payable 3 0 0 0 0 0
Total liabilities $ 4 3 9 2 2 0
Stockholders’ equity:
15% noncumulative preferred stock, $10 par,
12,000 shares issued and outstanding $ 1 2 0 0 0 0
Common stock, $50 par, 9,000 shares
issued and outstanding 4 5 0 0 0 0
Additional paid-in capital: Common stock 1 1 3 3 1 0
Total paid-in capital $ 6 8 3 3 1 0
Retained earnings (arising since April 1,
2006, the date of reorganization) 1 5 0 0 0
Total stockholders’ equity 6 9 8 3 1 0
Total liabilities & stockholders’ equity $1 1 3 7 5 3 0

The McGraw-Hill Companies, Inc., 2006

166 Modern Advanced Accounting, 10/e