SPECTRANS Chapter-17-Corporate-Liquidations-And-Reorganizations

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Chapter 17 Corporate Liquidations and Reorganizations
IFRS financial reporting (EAE Business School)
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Chapter 17 Test Bank
CORPORATE LIQUIDATIONS, REORGANIZATIONS, AND DEBT

RESTRUCTURINGS FOR FINANCIALLY DISTRESSED CORPORATIONS
Multiple Choice Questions
LO1
1. When the bankruptcy court grants an order for relief
a. creditors may not seek payment for their claims directly

from the debtor corporation.
b. the reorganization plan was accepted by creditors having at
least one-half of the total number of claims and the claims
represent at least two-thirds of the total amount owed.
c. the bankruptcy court confirms that the reorganization plan
is fair and equitable to creditors.
d. the court discharges the debtor except for those claims
provided for in the reorganization plan.
LO1
2. Which of the following must approve a Chapter 11 plan?
a. The organization’s management.

b. The assigned trustee.
c. The entity’s stockholders.
d. The court and the creditors.
LO1
3. When the accounting equation of a corporation computes a
negative ownership position, because liabilities are greater
than assets, the firm is
a. a distressed corporation.
b. a bankrupt corporation.
c. insolvent in the equity sense.
d. insolvent in the bankruptcy sense.
LO1
4. A bankruptcy petition filed by a firm’s creditors is
a. a Chapter 7 petition.
b. a petition for liquidation.
c. an involuntary petition.
d. a voluntary petition.

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LO1
5. The duties of a debtor in possession in a Chapter 11 bankruptcy
case do not include
a. filing a list of creditors and schedules of assets and

liabilities with the bankruptcy court.
b. operating the business during the reorganization period.
c. filing a reorganization plan.
d. surrendering all property to the trustee.
LO1
6. Liabilities incurred after entering Chapter 11
a. can only occur after secured creditors are paid.

b. must be approved by creditors’ committees in liquidation
cases.
c. must be approved by trustees.
d. must be preapproved by the bankruptcy court.
LO1
7. In a troubled debt restructuring involving a modification of
terms, the debtor’s gain on restructuring
a. will equal the creditor’s gain on restructuring.

b. will equal the creditor’s loss on restructuring.
c. may or may not equal the creditor’s gain on restructuring.
d. may or may not equal the creditor’s loss on restructuring.
LO1
8. A single creditor
a. can never file a petition for bankruptcy.

b. with a $10,000 or more secured claim may file a petition
for bankruptcy.
c. with a $10,000 or more unsecured claim may file a petition
for bankruptcy, if there are fewer than 12 unsecured
creditors.
d. with a $10,000 or more unsecured claim may file a petition
for bankruptcy if there are more than 12 unsecured
creditors.
LO1
9. A case against a corporate debtor
a. can be filed only under Chapter 7.

b. can be filed only under Chapter 11.
c. * can be filed either under Chapter 7 or Chapter 11.
d. will be determined by the trustee whether is shall be
Chapter 7 or Chapter 11.

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LO1
10. A primary difference between voluntary and involuntary
bankruptcy petitions is that
a. creditors file the petition in an involuntary filing.

b. trustees are not used in an voluntary filing.
c. voluntary petitions are not subject to review by the
bankruptcy court.
d. the debtor corporation files the petition in an involuntary
filing.
LO1
11. Creditor committees are elected
a. in all bankruptcy cases.

b. in Chapter 7 cases.
c. only in bankruptcy cases arising from involuntary
petitions.
d. in Chapter 11 cases.
LO2
12. The first-to-last ranking order of priority of the following:
I.stockholder claims
II.unsecured priority claims
III.secured claims
II.unsecured nonpriority claims
in a Chapter 7 bankruptcy case is
a. I,II,IV, and III.

b. III,II,IV and I.
c. III,I,IV, and II.
d. II,IV,III,and I.
LO2
13. In typical trustee accounting
a. gains and losses on the sale of assets are charged to the

estate equity account.
b. unrecorded liabilities discovered by the trustee are
credited to the estate equity account and credited to the
liability account.
c. liquidation expenses are charged to the estate equity
account.
d. all of the above procedures are typical for trustee
accounting.

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LO2
14. Trustees in a bankruptcy cases have the duty to
a. nullify affiliate transactions.

b. relegate tax payments to an unsecured status.
c. call creditor meetings on liquidation proceedings.
d. provide payments to creditors and customers.
LO3
15. If a debtor has material gains on its debt restructurings,
these gains will be reported as
a. operating gains of the debtor.

b. other non-operating gains of the debtor.
c. extraordinary gains of the debtor.
d. discontinued operations.
LO3
16. A creditor will record assets transferred in full settlement of
a note receivable at the
a. lower of cost or market value of the note receivable.

b. book value of the transferred assets.
c. fair market value of the note receivable.
d. fair market value of the transferred assets.
LO3
17. A judge would permit a debtor-in-possession in a
a. case with only secured creditors.

b. Chapter 7 case.
c. Chapter 11 case.
d. voluntary case.
LO4
18. Under the AICPA’s SOP 90-7, a reorganized company must meet a
“reorganization value test” as one of the two conditions
necessary for fresh start accounting. Reorganization value
approximates the
a. fair value of the entity’s total assets.

b. fair value of the entity’s net assets.
c. book value of the entity’s net assets.
d. None of the above choices are correct.

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LO4
19. Under the AICPA’s SOP 90-7, “prepetition liabilities subject to
compromise” are liabilities incurred before the Chapter 11
filing and are classified as
a. residual claims.
b. contingent claims.
c. current operating claims.
d. unsecured and undersecured claims.
LO4
20. Which of the following statements is correct concerning
companies emerging from reorganization under Chapter 11 when
they do not qualify for fresh start accounting?
a. The forgiveness of debt is reported as an operating gain.

b. Quasi-reorganization accounting is used.
c. The forgiveness of debt is reported as an extraordinary
item.
d. The forgiveness of debt is reported as an increase in
contributed capital.

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LO2
Exercise 1
Archery Corporation is liquidating under Chapter 7 of the Bankruptcy

Act. The accounts of Archery at the time of filing are summarized as
follows:
Estimated
Realizable
Book Value Value
Cash $ 10,000 $ 10,000
Accounts receivable-net 60,000 50,000
Inventory 110,000 70,000
Equipment-net 70,000 70,000
Land 20,000 40,000
Building-net 200,000 150,000
Goodwill 42,000
$ 512,000
Accounts payable $ 120,000

Wages and salaries 30,000
Contributions due to pension plan 20,000
Taxes payable 80,000
Accrued interest payable (includes 12,000
$10,000 from the mortgage payable and
$2,000 from the note payable)
Note payable 100,000
Mortgage payable 100,000
Capital stock 70,000
Deficit ( 20,000 )
$ 512,000
The land and building are pledged as security for the mortgage
payable as well as any accrued interest on the mortgage. The note
payable is secured with the equipment, but the interest on the note
is unsecured. Wages and salaries were accrued within the last 90 days
and pension plan contributions were accrued within the last 6 months;
neither exceeds $4,000 per employee. Liquidation expenses are
expected to be $50,000.
Required:
1. Prepare a schedule showing the priority rankings of the

creditors and the expected payouts.

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2. Banyo Corporation was a supplier to Archery Corporation and at

the time of Archery’s bankruptcy filing, Banyo’s account
receivable from Archery was $40,000. On the basis of the
estimates, how much can Banyo expect to receive?
LO2
Exercise 2
Hinsch Company is in bankruptcy and is being liquidated under the

provisions of Chapter 7 of the bankruptcy code. The trustee has
converted all assets into $120,000 cash and has prepared the
following list of approved claims:
Customer deposits ($1,000 from each of two customers

that ordered products that were never delivered) $ 2,000
Property taxes payable 4,000
Accounts payable, unsecured 30,000
Trustee’s fees and other costs of liquidation 16,000
Mortgage payable, secured by property that was sold

for $80,000 60,000
Note payable to bank, secured by all accounts

receivable of which $30,000 were collected and $10,000
were written off as uncollectible 30,000
Required
How much will the bank receive on the note payable?
LO2
Exercise 3
Ingham Corporation is being liquidated under Chapter 7 of the

Bankruptcy Act. The trustee has determined that the unsecured claims
will receive $.30 on the dollar. Platinum Corporation holds a $35,000
mortgage note receivable from Ingham that is secured by equipment
with a $17,500 book value and a $7,000 fair value.
Required:
How much of the mortgage receivable will be recovered by Platinum?

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LO2*&
Exercise 4
Buckley Corporation incurred major losses in 2005 and entered into

voluntary Chapter 7 bankruptcy in the early part of 2006. By July 1,
all assets were converted into cash, the secured creditors were paid,
and $74,000 in cash was left to pay the remaining claims as follows:

Claims prior to the trustee’s appointment 4,000
Property taxes payable 7,500
Wages payable (all under $4,000 per employee) 21,000
Unsecured note payable 28,000
Accrued interest on the note payable 3,000
Administrative expenses of the trustee 15,000
Total $ 100,500
Required:
Classify the claims by their Chapter 7 priority ranking, and analyze which
amounts will be paid and which amounts will be written off.
LO2
Exercise 5
Jones Corporation is being liquidated under Chapter 7 of the

will receive $.50 on the dollar. Kevin Corporation holds a $200,000
mortgage note receivable from Jones that is secured by marketable
securities with a $150,000 book value and a $164,000 fair value.
Required:
How much of the mortgage receivable will Kevin recover?
LO2
Exercise 6
Kresta Corporation is being liquidated under Chapter 7 of the

will receive $.25 on the dollar. Loanstar Corporation holds an
$80,000 mortgage note receivable from Kresta that is secured by
marketable securities with an $88,000 book value and a $60,000 fair
value.
Required:
How much of the mortgage receivable will Loanstar recover?

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LO3
Exercise 7
On December 31, 2005, Goldcoast bank agreed to restructure an

$800,000, 10% loan receivable from Fielding Corporation because of
Fielding’s financial problems. The loan was issued at par and at
December 31, there was $40,000 of accrued interest for a six-month
period. Terms of the restructuring agreement are as follows:
** Reduce the loan from $800,000 to $600,000;

** Extend the maturity date by 2 years from December 31, 2005
to December 31, 2007; and,
** Reduce the interest rate on the loan from 10% to 6%.
Present value assumptions:
Present value of $1 for 2 years at 6% = 0.8900

Present value of an annuity of $1 for 2 years at 6% = 1.8334
Required:
1. What amount of gain or loss from restructuring the loan will

Fielding report for 2005?
2. Compute the gain or loss that will be reported by Goldcoast

Bank. Assume that the bank has not recognized an impairment
before the restructuring.
LO3
Exercise 8
Logan Corporation owes Mango Finance Company $825,000 plus $53,750 of

accrued interest. Logan has a cash flow shortage and arranges for an
equity settlement of the loan with Mango by issuing 55,000 shares of
its $1.00 par value common stock to Mango on April 1, 2006. Logan
common stock has a market value of $13.75 per share on April 1.
Required:
Prepare Logan's journal entry to record the troubled debt

restructuring.

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LO3
Exercise 9
Matrix Corporation owes Norman Finance Company $750,000 on a note

payable plus $37,500 of accrued interest. Matrix has a cash flow
shortage and negotiates a debt restructuring with Norman by issuing
60,000 shares of its $1.00 par value common stock to Norman on
January 1, 2006. Matrix's common stock has a market value of $10.10
per share on January 1st.
Required:
Prepare Matrix's journal entry to record the troubled debt

restructuring.
LO3
Exercise 10
On December 31, 2006, Galvin Bank agreed to restructure a $900,000,

10% loan receivable from Hines Corporation because of Hines’
financial problems. The debt was issued at par and at December 31,
there was accrued interest of $60,000 for six months. Terms of the
restructuring agreement are as follows:
** Reduce the loan from $900,000 to $600,000;

** Extend the maturity date of the loan by 2 years from December
31, 2006 to December 31, 2008; and,
** Reduce the interest rate from 10% to 8%.
Present value assumptions:

Required:
1. What amount of gain or loss from restructuring the loan will

Hines report for 2006?
2. Compute the gain or loss that will be reported by Galvin Bank.

Assume that the bank has not recognized an impairment before the
restructuring.

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SOLUTIONS
Multiple Choice Questions
1. a
2. d
3. d
4. c
5. d
6. d
7. d
8. c
9. c
10. a
11. b
12. b
13. d
14. d
15. c
16. d
17. b
18. a
19. d
20. c

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Exercise 1
Requirement 1
Estimated
Amount Expected Remaining
of Claim Payment Cash
Estimated available cash $ 390,000
Secured claims:
Mortgage payable & interest $ 110,000 $ 110,000 $ 280,000
Partially secured claims:

Note payable ($30,000
reclassified as unsecured) 100,000 70,000 210,000
Unsecured priority claims:

Estimated liquidation expenses 50,000 50,000 160,000
Wages and salaries 30,000 30,000 130,000
Pension fund liability 20,000 20,000 110,000
Taxes payable 80,000 80,000 30,000
Unsecured nonpriority claims:

Unsecured portion of note 30,000
payable
Accrued interest on note 2,000 0
payable
Expected return on the dollar for unsecured nonpriority claims:

$30,000/$150,000 = $.20 on the dollar
Requirement 2
Banyo’s estimated return: $40,000 claim x $.20 = $8,000

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Exercise 2
Cash $ 120,000
Mortgage payable, paid in full ( 60,000 )
60,000
Note payable to bank, secured portion ( 30,000 )
30,000
Priority claims ($16,000 of administrative costs +
$2,000 of customer deposits + $4,000 property tax) ( 22,000 )
Available for unsecured nonpriority claims $ 8,000
Unsecured, nonpriority claims:

Unsecured portion of note payable to bank $ 10,000
Accounts payable 30,000
Total unsecured, nonpriority claims $ 40,000
$8,000 cash/$40,000 claims = $.20 on the dollar
Amount paid to bank:

$30,000 for secured portion + ($10,000 x .20) for
unsecured portion = $ 32,000
Exercise 3
Mortgage note receivable $ 35,000

Less: Portion secured by equipment ( 7,000 )
Unsecured portion $ 28,000
Estimated recovery on secured portion $ 7,000

Estimated recovery on unsecured portion
($28,000 x $.30) = 8,400
Recovery on mortgage note receivable $ 15,400

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Exercise 4
Requirement 1
Unsecured priority claims:
Claim To be Cash
Amount Paid Left
Administrative expenses $ 15,000 $ 15,000 $ 59,000
Claims prior to the trustee’s

appointment 4,000 4,000 55,000
Wages payable 21,000 21,000 34,000
Property taxes payable 7,500 7,500 26,500
Unsecured Nonpriority Claims: Claim To be Written

Amount Paid Off
Accounts payable $ 22,000 $ 11,660 *$ 10,340
Unsecured note 28,000 14,840 ** 13,160
Accrued interest on the note 3,000 0 3,000
$26,500/($22,000 + $28,000)
= 53%
* $22,000 x 53% = $11,660

**$28,000 x 53% = $14,840
Exercise 5

Less: Portion secured by marketable securities ( 164,000 )

($36,000 x $.50) = 18,000

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Exercise 6

Less: Portion secured by marketable securities ( 60,000 )

(20,000 x $.25) = 5,000
Exercise 7
Requirement 1
Fielding’s gain on restructuring:

Carrying value of the debt ($800,000 + $40,000
accrued interest) $ 840,000
Total future cash flows
($600,000 + $72,000 interest) ( 672,000 )
Gain on restructuring $ 168,000
Requirement 2
Goldcoast Bank’s loss on restructuring:
Carrying value of the loan before restructuring $ 840,000

Present value of $600,000 due in 2 years at 10%
historical rate: $600,000 x .8264 = $495,840
Present value of $36,000 interest for 2
years at 10% historical rate =
$36,000 x 1.7355 = 62,478
Carrying value of the loan $558,318 ( 558,318 )
Loss on restructuring $ 281,682
Exercise 8

Accrued interest payable 53,750
Common stock, $10 par 55,000
Capital paid in excess of par 756,250
Extraordinary gain on restructuring 67,500

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Exercise 9

Accrued interest payable 37,500
Common stock, $1 par 40,000
Capital paid in excess of par 546,000
Extraordinary gain on restructuring 201,500
Exercise 10
Requirement 1
Hines’ gain on restructuring:

Carrying value of the debt ($900,000 + $60,000
accrued interest) $ 960,000
Total future cash flows
($600,000 + $96,000 interest) ( 696,000 )
Gain on restructuring $ 264,000
Requirement 2
Galvin’s loss on restructuring:
Carrying value of the loan before restructuring $ 960,000

Present value of $600,000 due in 2 years at 10%
historical rate: $600,000 x .8264 = $495,840
Present value of $48,000 interest for 2
years at 10% historical rate =
$48,000 x 1.7355 = 83,304
Carrying value of the loan $579,144 ( 579,144 )
Loss on restructuring $ 380,856

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Chapter 17 Corporate Liquidations and Reorganizations

IFRS financial reporting (EAE Business School)

StuDocu is not sponsored or endorsed by any college or university

Chapter 17 Test Bank

CORPORATE LIQUIDATIONS, REORGANIZATIONS, AND DEBT

Multiple Choice Questions

a. creditors may not seek payment for their claims directly

a. The organization’s management.

Downloaded by Larence Nova (larence.nova@yahoo.com)

a. filing a list of creditors and schedules of assets and

a. can only occur after secured creditors are paid.

a. will equal the creditor’s gain on restructuring.

a. can never file a petition for bankruptcy.

a. can be filed only under Chapter 7.

Downloaded by Larence Nova (larence.nova@yahoo.com)

a. creditors file the petition in an involuntary filing.

a. in all bankruptcy cases.

in a Chapter 7 bankruptcy case is

a. I,II,IV, and III.

a. gains and losses on the sale of assets are charged to the

Downloaded by Larence Nova (larence.nova@yahoo.com)

a. nullify affiliate transactions.

a. operating gains of the debtor.

a. lower of cost or market value of the note receivable.

a. case with only secured creditors.

a. fair value of the entity’s total assets.

Downloaded by Larence Nova (larence.nova@yahoo.com)

a. The forgiveness of debt is reported as an operating gain.

Downloaded by Larence Nova (larence.nova@yahoo.com)

Archery Corporation is liquidating under Chapter 7 of the Bankruptcy

Accounts payable $ 120,000

1. Prepare a schedule showing the priority rankings of the

Downloaded by Larence Nova (larence.nova@yahoo.com)

2. Banyo Corporation was a supplier to Archery Corporation and at

Hinsch Company is in bankruptcy and is being liquidated under the

Customer deposits ($1,000 from each of two customers

Property taxes payable 4,000

Accounts payable, unsecured 30,000

Trustee’s fees and other costs of liquidation 16,000

Mortgage payable, secured by property that was sold

Note payable to bank, secured by all accounts

How much will the bank receive on the note payable?

Ingham Corporation is being liquidated under Chapter 7 of the

How much of the mortgage receivable will be recovered by Platinum?

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Buckley Corporation incurred major losses in 2005 and entered into

Accounts payable $ 22,000

Jones Corporation is being liquidated under Chapter 7 of the

How much of the mortgage receivable will Kevin recover?

Kresta Corporation is being liquidated under Chapter 7 of the

How much of the mortgage receivable will Loanstar recover?

Downloaded by Larence Nova (larence.nova@yahoo.com)

On December 31, 2005, Goldcoast bank agreed to restructure an

** Reduce the loan from $800,000 to $600,000;

Present value assumptions:

Present value of $1 for 2 years at 6% = 0.8900

1. What amount of gain or loss from restructuring the loan will

2. Compute the gain or loss that will be reported by Goldcoast

Logan Corporation owes Mango Finance Company $825,000 plus $53,750 of

Prepare Logan's journal entry to record the troubled debt

Downloaded by Larence Nova (larence.nova@yahoo.com)