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TRUE OR FALSE: Write |
if the statement is true and  if otherwise.

_______1. Trustees are required to pay off the debt of the insolvent company, even without the court¶s order, as part of his duty.

_______2. The insolvent company or the financially distressed corporation doesn¶t prepare any entries for all the transactions
entered by the trustee.

_______3. Losses and gains accrued prior to the appointment of the trustee should be identified with the debtor.

_______4. The law mandates a specific accounting system should be used for the accounting of trustees.

_______5. When using a special account and the trustee paid for a note the insolvent corporation had paid before the
assignment, the Debtor¶s account on the trustee¶s records and the Trustee¶s account on the Debtor¶s books will of course be
equal given it is reciprocal accounts.

PROBLEM 1
On Jan 1, 2010, TARO Incorporated was assigned by the court as trustee for ARA Corporation, an insolvent company. The
following balances were reflected in the books of TARO after due adjustments. TARO decided to use special nominal accounts in
recording all of the transactions.
Cash P300000 Accounts Payable 100000
Accounts Receivable 120000 Notes Payable 200000
Inventories 100000 Interest on Notes Payable 25000
PPE 360000 Common Stock 300000
Investment in P Co. Paid in Capital 345000
(2000 shares @ 10) 20000 Retained Earnings (188000)

The balance of the accounts receivable includes P10000 estimated bad debts. The PPE had an economic useful life of 5 yrs. It was
acquired on March 5, 2008. The company uses straight line method of depreciation.

A summary of transactions during the year 2010 is presented below.

Sale on accounts for 250000

Subsequently paid in cash 200000
Allowance for bad debts 5000
Sales returns 1000
Sales Discount 2000
All of ARA¶s accounts were collected, 25000 of which proved to be uncollectible.
Purchase inventories by issuing notes from the trustee. Inventories cost 70000.
Sold 1500 of P Co. stocks for 15 each.

Paid ARA¶s notes and interest of 30000

Paid accounts (old) 100000
Paid notes (new) 50000

Inventories at the end of the year amounts to 90000.

Accrued interest at the end of the year is 15000.
Selling expenses 75000
Operating expenses 80000

1. Give the entries to record the transfer

2. Give the entries to record the transactions of the trustee on both the trustee and the debtor¶s books.
3. Give the entries to adjust and close the books of the trustee.
4. Give the entry in the book of the trustee to record the return of assets.
5. The balance of the trustee account in the debtor¶s book before closing . ________________
6. Increase (Decrease) in the retained earnings of the debtor after closing. ________________
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a. Cash 300000
Account receivable, Old 120000
Inventories, 100000
PPE 360000
Investment in P Co., 20000
Allowance for Bad debts, Old 10000
Accumulated Depreciation 132000
Ara Corp.,Debtor 758000
B Accounts Receivable 250000
Sales 250000
Cash 200000
Sales Returns 1000
Sales Discounts 2000
Accounts Receivable 203000
C Cash 95000
Allowance for Bad Debts, Old 10000
Ara Corp-Bad debts expense, old 15000
Accounts Receivable, Old 120000
D Inventories 70000
Notes Payable 70000
E Cash 22500
Investment in P Co. 15000
ARA Corp-Gain on Sale of Investment in P Co. 7500
F Ara Corp Liabilities Paid-Notes Payable, Old 200000
Ara Corp Liabilities Paid- Interest on Notes Payable, Old 25000
Ara Corporation-Interest expense on Notes Payable, Old 5000
Cash 230000
G Ara Corp Liabilities Paid- Accounts Payable, Old 100000
Notes Payable 50000
Cash 150000
H Operating Expenses 80000
Cash 80000

I Interest Expense 15000

Interest Payable 15000
J Bad debt expense 5000
Allowance for Bad debts 5000
K Depreciation Expense 72000
Accumulated Depreciation 72000


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L Income Summary 100000

Inventories 100000
Inventories 90000
Income Summary 90000

M Sales 250000
Sales Returns 1000
Sales Discounts 2000
Purchases 70000
Operating Expenses 80000
Interest Expenses 15000
Bad Debt Expense 5000
Depreciation Expense 72000
Income summary 75000
N Ara corp- Gain on Sale of Investment in P Co. 7500
Income Summary 12500
Ara Corp- Bad debts expense, old 15000
Ara Corp-Interest Expense on Notes Payable,Old 5000
O Ara Corporation, Debtor 17500
Income Summary 17500


P Ara Cop, Debtor 325000

Ara Corp Liabilities Paid-Notes Payable, Old 200000
Ara Corp Liabilities Paid-Interest on Notes Payable, Old 25000
Ara Cop Liabilities Paid-Accounts Payable, Old 100000
Q Ara Corp, Debtor 415500
Allowance for Bad Debts 5000
Accumulated Depreciation 204000
Notes Payable 20000
Interest Payable 15000
Cash 157500
Accounts Receivable 47000
Inventories 90000
PPE 360000
Investment in P Co. 5000

Debtor¶s Books
Taro Incorporated 758000
Allowance for Bad debts 10000
Accumulated Depreciation 132000
Cash 300000
Accounts Receivable 120000
Inventories 100000
PPE 360000
Investment in P Co. 20000


F Taro Incorporated, Trustee 225000

Ara Corp Liailities Paid-Notes Payable, Old 200000
Ara Corp Liabilities Paid-Interest On Notes Payable, Old 25000
G Taro Incorporated Trustee 100000
Ara Corp Liabilites Paid-Accounts Payable, Old 100000
O Retained Earnings 17500
Taro Incorporated, Trustee 17500

5 Balance of Trustee Account 433000

6 Decrease
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