Homework Lance
[QUESTION]
1. 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.
Answer: C
Learning Objective: 13-05
Topic: Liquidation versus Reorganization
Difficulty: 1 Easy
Blooms: Remember
AACSB: Reflective Thinking
AICPA BB: Legal
[QUESTION]
2. 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.
Answer: D
Learning Objective: 13-09
Topic: Reorganization reporting―GAAP
Difficulty: 1 Easy
Blooms: Remember
AACSB: Reflective Thinking
AICPA BB: Legal
AICPA: FN Measurement
[QUESTION]
3. 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.
Answer: A
Learning Objective: 13-09
Topic: Reorganization reporting―GAAP
Difficulty: 2 Medium
Blooms: Remember
AACSB: Reflective Thinking
AICPA BB: Legal
AICPA: FN Measurement
[QUESTION]
4. 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.
Answer: E
Learning Objective: 13-09
Topic: Reorganization reporting―GAAP
Difficulty: 2 Medium
Blooms: Remember
AACSB: Reflective Thinking
AICPA BB: Legal
AICPA: FN Measurement
[QUESTION]
5. 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.
Answer: B
Learning Objective: 13-10
Topic: Reorganized entity―Fresh start―GAAP
Difficulty: 2 Medium
Blooms: Remember
AACSB: Reflective Thinking
AICPA BB: Legal
AICPA: FN Measurement
[QUESTION]
6. 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.
Answer: D
Learning Objective: 13-10
Topic: Reorganized entity―Fresh start―GAAP
Difficulty: 1 Easy
Blooms: Remember
AACSB: Reflective Thinking
AICPA BB: Legal
AICPA: FN Measurement
[QUESTION]
7. 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.
Answer: E
Learning Objective: 13-03
Topic: Distinguish voluntary and involuntary
Difficulty: 2 Medium
Blooms: Remember
AACSB: Reflective Thinking
AICPA BB: Legal
[QUESTION]
8. 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.
Answer: B
Learning Objective: 13-04
Topic: Classification of priority liabilities
Difficulty: 1 Easy
Blooms: Remember
AACSB: Reflective Thinking
AICPA BB: Legal
[QUESTION]
9. 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.
Answer: A
Learning Objective: 13-06
Topic: Statement of Financial Affairs
Difficulty: 1 Easy
Blooms: Remember
AACSB: Reflective Thinking
AICPA BB: Legal
AICPA: FN Measurement
[QUESTION]
10. 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.
Answer: C
Learning Objective: 13-06
Topic: Statement of Financial Affairs
Difficulty: 1 Easy
Blooms: Remember
AACSB: Reflective Thinking
AICPA BB: Legal
AICPA: FN Measurement
[QUESTION]
11. 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.
Answer: E
Learning Objective: 13-06
Topic: Statement of Financial Affairs
Difficulty: 2 Medium
Blooms: Remember
AACSB: Reflective Thinking
AICPA BB: Legal
AICPA: FN Measurement
[QUESTION]
12. 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.
Answer: C
Learning Objective: 13-06
Topic: Statement of Financial Affairs
Difficulty: 2 Medium
Blooms: Remember
AACSB: Reflective Thinking
AICPA BB: Legal
AICPA: FN Measurement
[QUESTION]
13. 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.
Answer: D
Learning Objective: 13-06
Topic: Distinguish pledged and free assets
Difficulty: 1 Easy
Blooms: Remember
AACSB: Reflective Thinking
AICPA BB: Legal
AICPA: FN Measurement
[QUESTION]
14. 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.
Answer: B
Learning Objective: 13-06
Topic: Statement of Financial Affairs
Difficulty: 1 Easy
Blooms: Remember
AACSB: Reflective Thinking
AICPA BB: Legal
AICPA: FN Measurement
[QUESTION]
15. 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.
Answer: A
Learning Objective: 13-08
Topic: Reorganization plan
Difficulty: 1 Easy
Blooms: Remember
AACSB: Reflective Thinking
AICPA BB: Legal
AICPA FN: Research
[QUESTION]
16. 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.
Answer: B
Learning Objective: 13-08
Topic: Reorganization plan
Difficulty: 2 Medium
Blooms: Remember
AACSB: Reflective Thinking
AICPA BB: Legal
AICPA FN: Research
[QUESTION]
17. 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.
Answer: A
Learning Objective: 13-09
Topic: Reorganization reporting―GAAP
Difficulty: 2 Medium
Blooms: Remember
AACSB: Reflective Thinking
AICPA BB: Legal
AICPA: FN Measurement
[QUESTION]
18. 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.
Answer: E
Learning Objective: 13-09
Topic: Reorganization reporting―GAAP
Difficulty: 2 Medium
Blooms: Remember
AACSB: Reflective Thinking
AICPA BB: Legal
AICPA: FN Measurement
[QUESTION]
19. 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.
Answer: C
Learning Objective: 13-07
Topic: Calculate amount to pay creditors
Difficulty: 2 Medium
Blooms: Analyze
Blooms: Apply
AACSB: Analytical Thinking
AACSB: Knowledge Application
AICPA BB: Legal
AICPA: FN Measurement
Feedback: Sale of land $110,000 + 40% of remaining $40,000 owed = $126,000
Use the following to answer questions 20 and 21:
REFERENCE: 13-01
Quincy Corp., about to be liquidated, has the following amounts for its assets and liabilities:
The mortgage is secured by the land and building, and the note payable is secured by the equipment. Quincy expects that the expenses of administering the liquidation will total $40,000.
[QUESTION]
REFER TO: 13-01
20. How much should Quincy expect to pay on the accounts payable?
A) $240,000.
B) $128,000.
C) $120,000.
D) $ 96,000.
E) $146,000.
Answer: D
Learning Objective: 13-07
Topic: Calculate amount to pay creditors
Difficulty: 3 Hard
Blooms: Apply
Blooms: Analyze
AACSB: Knowledge Application
AACSB: Analytical Thinking
AICPA BB: Legal
AICPA: FN Measurement
Feedback: Assets available for priority claims and unsecured creditors: $220,000 [$140,000 (current assets) + $80,000 (net realizable value of equipment less note payable secured by the equipment)] – priority claims [$100,000 ($40,000 administrative expenses + $60,000 income taxes payable)] = $120,000
$120,000 free assets/$300,000 unsecured ($240,000 A/P + unsecured portion of mortgage $60,000) = payment of 40% on unsecured dollars.
40% × $240,000 A/P = $96,000
[QUESTION]
REFER TO: 13-01
21. How much should the mortgage holder expect to collect from the liquidation?
A) $474,000
B) $510,000
C) $450,000
D) $480,000
E) $478,000
Answer: A
Learning Objective: 13-07
Topic: Calculate amount to pay creditors
Difficulty: 3 Hard
Blooms: Apply
AACSB: Knowledge Application
AICPA BB: Legal
AICPA: FN Measurement
Feedback: Land and building sold for $450,000 leaves $60,000 unsecured and owed.
40% * × $60,000 = $24,000
Mortgage holder expects $450,000 + $24,000 = $474,000
* Assets available for priority claims and unsecured creditors: $220,000 [$140,000 (current assets) + $80,000 (net realizable value of equipment less note payable secured by the equipment)] – priority claims [$100,000 ($40,000 administrative expenses + $60,000 income taxes payable)] = $120,000
$120,000 free assets/$300,000 unsecured ($240,000 A/P + unsecured portion of mortgage $60,000) = payment of 40% on unsecured dollars.
[QUESTION]
22. Gongman Corp. owned the following assets when it came out of a Chapter 11 bankruptcy:
Book
Fair
Value
Value
Inventory
$
200,000
$
160,000
Land
80,000
150,000
Buildings
300,000
340,000
Equipment
400,000
250,000
Gongman Corp. had a fresh start reorganization value of $1,000,000. What amount of goodwill should have been recognized in recording the reorganization?
A) $ 20,000.
B) $100,000.
C) $ 60,000.
D) $210,000.
E) $ 98,000.
Answer: B
Learning Objective: 13-10
Topic: Reorganized entity―Fresh start―GAAP
Difficulty: 2 Medium
Blooms: Apply
AACSB: Knowledge Application
AICPA BB: Legal
AICPA: FN Measurement
Feedback: Reorganization Value $1,000,000 – Identifiable FV of Assets ($160,000 + $150,000 + $340,000 + $250,000) $900,000 = Unidentifiable FV $100,000 (i.e., Goodwill)
Use the following to answer questions 23 – 25:
REFERENCE: 13-02
Mandich Co. had the following amounts for its assets, liabilities, and stockholders’ equity accounts just before filing a bankruptcy petition and requesting liquidation:
Net
Book
Realizable
Value
Value
Cash
$
10,000
$
10,000
Accounts receivable
100,000
60,000
Inventory
350,000
350,000
Land
110,000
75,000
Building and equipment
700,000
300,000
Accounts payable
100,000
Salaries payable
70,000
Notes payable (secured by inventory)
300,000
Employees’ claims for contributions to pension plans
10,000
Taxes payable
80,000
Liability for accrued expenses
25,000
Bonds payable
500,000
Common stock
200,000
Additional paid-in capital
100,000
Retained earnings (deficit)
(115,000)
Of the salaries payable, $30,000 was owed to an officer of the company. The remaining amount was owed to salaried employees who had not been paid within the previous 80 days: John Webb was owed $10,600, Samantha Jones was owed $15,000, Sandra Johnson was owed $11,900, and Dennis Roberts was owed $2,500. The maximum owed for any one employee’s claims for contributions to benefit plans was $800. Estimated expense for administering the liquidation amounted to $40,000.
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