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Chapter 14, Modern Advanced accounting-review Q & exr

Chapter 14, Modern Advanced accounting-review Q & exr

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CHAPTER 14BANKRUPTCY: LIQUIDATION AND REORGANIZATION
The title of each problem is followed by the estimated time in minutes required for completion and by adifficulty 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 bereceived 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 statementof 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 atend 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 asa financial state in which the current fair value of the entity's property, exclusive of propertywithheld 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 thevarious 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 securedcreditors, 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 assetsof 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, creditunion, 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 debtsaggregating $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 petitioninclude railroad, insurance, credit union, and banking corporations. Savings and loan associationsalso 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 moreunsecured creditors. If there are fewer than 12 unsecured creditors involved, one or more creditorshaving unsecured claims of $10,000 or more in the aggregate may file the petition.
© 
The McGraw-Hill Companies, Inc., 2006 Solutions Manual, Chapter 14
149
 
8.A
statement of financial affairs
under the Bankruptcy Code is a form filed with a debtor's petitionthat contains a series of questions answered by the debtor concerning all aspects of the financialcondition and operations of the debtor.9.Debts that have priority over other unsecured debts under the provisions of the Bankruptcy Codeare 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 90days 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 fishstorage 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 limitations10.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 theunsecured liabilities of the debtor that have priority.11.A bankruptcy trustee may invalidate a
preference
under provisions of the Bankruptcy Code andrecover from the creditor the cash or property constituting the preference, for inclusion in thedebtor'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 bankruptcytrustee 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, theassets and liabilities of a debtor's estate for which the trustee is responsible are entered in theaccounting records of the trustee at their statement of affairs valuations, with an offset to amemorandum-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 heardin the bankruptcy court's consideration of the plan.17.No, all classes of creditors need not accept a reorganization plan. The bankruptcy court maynonetheless 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 BankruptcyCode involves valuing the enterprise's assets and liabilities at current fair values and writing off aretained earnings deficit against additional paid-in capital. Fresh start reporting is appropriate for areorganized enterprise whose former stockholders no longer control the enterprise; it is essentially anew reporting enterprise.
SOLUTIONS TO EXERCISES
Ex. 14–1
1.
c
10.
c
2.
b
11.
c
3.
c
12.
c
4.
13.
b
© 
The McGraw-Hill Companies, Inc., 2006 
150
Modern Advanced Accounting, 10/e
 
5.
14.
b
6.
b
15.
b
7.
b
[$10,000 + ($40,000 x 0.50) = $30,000]16.
8.
b
17.
b
9.
a
Ex. 14–2
Estimated amount of assets expected to be received by creditors of Downside Company, Dec.18, 2006:Fully secured liabilities (100%)$ 80,000Unsecured liabilities with priority (100%)60,000Partially secured liabilities [$40,000 + ($10,000 x 0.80)]48,000Unsecured liabilities without priority ($90,000 x 0.80) 72,000Total assets ($100,000 + $40,000 + $120,000)$260,000
Ex. 14–3
Computation of total estimated deficiency to unsecured, nonpriority creditors of FoldupCompany, Apr. 30, 2006:Estimated amount available [$280,000 + ($80,000 $60,000)]$300,000Less: Unsecured liabilities with priority 40,000Estimated amount available to unsecured, nonpriority creditors (72 cents onthe dollar)$260,000Estimated deficiency to unsecured, nonpriority creditors (28 cents on thedollar) 100,000Unsecured, nonpriority creditors [$330,000 + ($80,000 – $50,000)]$360,000
Ex. 14–4
Expected distribution of Windup Company's assets to its creditors, Apr. 30, 2006:To pay fully secured liabilities (100%)$ 60,000To pay unsecured liabilities with priority (100%)30,000To pay partially secured liabilities [$30,000 + ($10,000 x 0.50)]35,000To pay unsecured liabilities without priority ($50,000 x 0.50) 25,000Total assets ($70,000 + $30,000 + $50,000)$150,000
Ex. 14–5
Amount expected to be paid to each class of creditors of Liquo Company, Dec. 17, 2006:
Class of creditorTotalclaimsComputationEstimatedamount
Fully secured$ 60,000100%$ 60,000Unsecured, priority14,000100%14,000Partially secured120,000$104,000 +($16,000 x 0.65)114,400Unsecured, no priority224,00065%145,600Total 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$60,000Add: Proportionate recovery on $40,000 ($100,000 – $60,000 = $40,000) unsecured portion:Free assets, at current fair value$140,000Addition from assets pledged for fully securedliabilities ($190,000 $130,000) 60,000Total free assets$200,000Less: Unsecured liabilities with priority 20,000Amount available for unsecured liabilities without priority$180,000Total unsecured liabilities without priority ($260,000 +$40,000)$300,000Proportionate recovery percentage ($180,000
÷
$300,000)0.60
© 
The McGraw-Hill Companies, Inc., 2006 Solutions Manual, Chapter 14
151

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