What was the total amount of unsecured liabilities with priority?

A) $130,000.

B) $155,000.

C) $167,850.

D) $197,850.

E) $200,000.

Answer: C

Learning Objective: 13-04

Topic: Classification of priority liabilities

Difficulty: 3 Hard  

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Legal

AICPA: FN Measurement

Feedback: Pension $10,000 + Salaries $37,850 (sum of $10,600 + $12,850 (15,000 limited to 12,850 per individual) + $11,900 + $2,500) + Taxes $80,000 + Liquidation expenses $40,000 = $167,850

[QUESTION]

REFER TO: 13-02

24.  On a statement of financial affairs, what amount would have been shown as assets available to pay liabilities with priority and unsecured creditors?

A) $390,000.

B) $445,000.

C) $495,000.

D) $660,000.

E) $795,000.

Answer: C

Learning Objective: 13-06

Topic: Distinguish pledged and free assets

Difficulty: 2 Medium  

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Legal

AICPA: FN Measurement

Feedback: Net Realizable Value of Cash ($10,000) + A/R ($60,000)  + Inventory Net of Note Payable ($50,000)  + Land ($75,000)  + Building ($300,000) = $495,000

[QUESTION]

REFER TO: 13-02

25.  What amount would the company have expected to pay for every dollar of unsecured liability without priority?

A) $.30.

B) $.40.

C) $.50.

D) $.60.

E) $.75.

Answer: C

Learning Objective: 13-06

Topic: Calculate amount to pay creditors

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Legal

AICPA: FN Measurement

Feedback: Assets available for priority claims and unsecured creditors of $495,000 – Priority claims of $167,850 = Assets available for non-priority unsecured creditors $327,150.

$327,150/$657,150 unsecured liabilities = $.50 (Rounded)

 

[QUESTION]

26.  All of the following items are liabilities with priority except:

A) Obligations arising between the date an order of relief is issued and the date of final realization of assets.

B) Employee claims for contributions to benefit plans earned during the 180 days preceding the filing of a petition, limited to $12,850 per individual.

C) Government claims for unpaid taxes.

D) Claims for the return of deposits made by customers to acquire property or services, which were never delivered or provided by the debtor, limited to $2,850.

E) Claims for administrative expenses in preserving and liquidating the company.

Answer: A  

Learning Objective: 13-04

Topic: Classification of priority liabilities

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Legal 

  

[QUESTION]

27.  How are assets and liabilities valued on a Statement of Financial Affairs?

Assets

Liabilities
A.

Fair value

Book value
B.

Book value

Amount required for settlement
C.

Book value

Book value
D.

Fair value

Amount required for settlement
E.

Net realizable value

Amount required for settlement

Answer: E

Learning Objective: 13-06      

Topic: Statement of Financial Affairs

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Legal

AICPA: FN Measurement

 

[QUESTION]

28.  Assuming all of the following expenses have priority, in what order are they prioritized?

A) Administrative expenses, employee claims for wages, unpaid taxes, claims for the return of customer deposits.

B) Employee claims for wages, unpaid taxes, administrative expenses, claims for the return of customer deposits.

C) Unpaid taxes, administrative expenses, employee claims for wages, return of customer deposits.

D) Administrative expenses, employee claims for wages, claims for the return of customer deposits, unpaid taxes.

E) Unpaid taxes, return of customer deposits, employee claims for wages, administrative expenses.

Answer: D  

Learning Objective: 13-04

Topic: Classification of priority liabilities

Difficulty: 2 Medium 

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Legal 

[QUESTION]

29.  Which of the following is not a responsibility of the bankruptcy trustee?

A) Recover all property belonging to the insolvent company.

B) Liquidate common stock of the company.

C) Preserve the estate from any further deterioration.

D) Make distributions to the proper claimants.

E) Void preferences made by the debtor within 90 days prior to the filing of the bankruptcy petition if the company was already insolvent.

Answer: B

Learning Objective: 13-07 

Topic: Trustee duties

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Legal

[QUESTION]

30.  What information is conveyed by the Statement of Realization and Liquidation?

A) Account balances reported by the company at the date of the filing of the bankruptcy petition.

B) Cash receipts generated by the sale of the debtor’s property.

C) Write up of assets.

D) Recognition of recorded liabilities.

E) Assets and liabilities but not stockholders’ equity.

Answer: B  

Learning Objective: 13-07 

Topic: Statement of Realization and Liquidation

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AICPA BB: Legal

AICPA: FN Measurement

  

[QUESTION]

31.  Which statement is false regarding a plan for reorganization?

A) The plan is the heart of every Chapter 7 bankruptcy.

B) The provisions of the plan specify the treatment of all creditors and equity holders upon approval by the Court.

C) The plan shapes the financial structure of the entity that emerges.

D) The plan may contain numerous provisions as solutions to financial difficulties.

E) The plan may contain provisions 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

[QUESTION]

32.  Which statement is false regarding the acceptance and confirmation of a reorganization plan?

A) The plan must be voted on by the creditors and the stockholders of the company.

B) A separate vote is required of each class of stockholders.

C) Any class of creditors that is not damaged by a reorganization is assumed to have accepted the plan without voting.

D) Even if creditors and stockholders approve of the plan, the court can reject the plan.

E) Acceptance of the plan requires the approval of two-thirds in number of claims and one-half in dollar amount of creditors that cast votes.

Answer: E

Learning Objective: 13-08     

Topic: Reorganization plan

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Legal

  

Use the following to answer questions 33 – 36:

REFERENCE: 13-03

A company that was to be liquidated had the following liabilities:

Income Taxes

$  10,000

Notes Payable secured by land

100,000

Accounts Payable

44,000

Salaries Payable ($16,000 for Employee #1

   and $4,000 for Employee #2)    

20,000

Administrative expenses for liquidation

20,000

The company had the following assets:

Book Value

Fair Value

Current Assets

$100,000

 95,000

Land

50,000

 75,000

Building

150,000

200,000

[QUESTION]

REFER TO: 13-03

33.  Total assets, available to pay liabilities with priority and unsecured creditors, are calculated to be what amount?

A) $  75,000.

B) $270,000.

C) $275,000.

D) $295,000.

E) $370,000.

Answer: D

Learning Objective: 13-06  

Topic: Statement of Financial Affairs

Difficulty: 1 Easy  

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Legal

AICPA: FN Measurement

Feedback: $200,000 Building + $95,000 Current Assets = $295,000

[QUESTION]

REFER TO: 13-03

34.  Total liabilities with priority are calculated to be what amount?

A) $  30,000.

B) $  36,850.

C) $  46,850.

D) $  50,000.

E) $150,000.

Answer: D

Learning Objective: 13-06  

Topic: Statement of Financial Affairs

Difficulty: 2 Medium  

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Legal

AICPA: FN Measurement

Feedback: Employee Wages ($12,850 + $4,000) + Liquidation Administrative Expenses ($20,000) + Taxes ($10,000) = $46,850

[QUESTION]

REFER TO: 13-03

35. Assets available for unsecured creditors after payments of liabilities with priority are calculated to be what amount?

A) $223,150.

B) $248,150.

C) $220,000.

D) $243,150.

E) $275,000.

Answer: B

Learning Objective: 13-06  

Topic: Statement of Financial Affairs

Difficulty: 2 Medium  

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Legal

AICPA: FN Measurement

Feedback: $295,000 Assets Available to Pay Liabilities with Priority and Unsecured Creditors – $46,850 Liabilities with Priority = $248,150

[QUESTION]

REFER TO: 13-03

36. Total unsecured non-priority liabilities are calculated to be what amount?

A) $  44,000.

B) $  47,150.

C) $  72,150.

D) $  74,000.

E) $220,000.

Answer: C

Learning Objective: 13-06  

Topic: Statement of Financial Affairs

Difficulty: 2 Medium  

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Legal

AICPA: FN Measurement

Feedback:  Excess of salaries $3,150 + Notes Payable in Excess of Security $25,000 + A/P of $44,000 = $75,000

[QUESTION]

37. A company is insolvent when

A) It is unable to pay debts as the obligations come due.

B) It is more likely than not that it will not be able to pay debts within a reasonable period of time following the date such obligations become due.

C) It is unable to timely remit payment on more than two-thirds of its outstanding obligations measured on a rolling three-month basis.

D) It is unable to pay debts within 90 days following the close of the company’s reporting year, whether such year is a calendar or fiscal year.

E) It is in default on one-third or more of its outstanding debt obligations.

Answer: A

Learning Objective: 13-01  

Topic: Bankruptcy laws

Difficulty: 1 Easy  

Blooms: Remember

AACSB: Reflecting Thinking

AICPA BB: Resource Management

AICPA FN: Risk Analysis

[QUESTION]

38. Which of the following conditions or events does not signal an entity’s inability to pay its debts as they become due?

A) Recurring operating losses.

B) Drops in the closing stock prices on a recognized stock exchange.

C) Working capital deficiencies.

D) Loan defaults.

E) Negative cash flows from operating activities.

Answer: B

Learning Objective: 13-02  

Topic: Conditions that signal troubled business

Difficulty: 1 Easy  

Blooms: Remember

AACSB: Reflecting Thinking

AICPA BB: Resource Management

AICPA FN: Risk Analysis

[QUESTION]

39.  For each of the following situations, select the best answer concerning the classification of the liability.

(A.) Unsecured without priority

(B.) Unsecured with priority

(C.) Partially secured

(D.) Fully secured

___ 1. Payroll taxes payable.

___ 2. Land and building valued at $427,000 mortgaged by a bank loan in the amount of $517,000.

___ 3. Equipment valued at $73,000 securing a loan to an individual in the amount of $32,100.

___ 4. Salaries payable to employees in the following amounts:  $1,250; $1,876; $4,500.

___ 5. Electric bill owed to a local utility.

___ 6. Unpaid defined contribution pension plan payments in the amount of $4,000 (none in excess of $375 per employee.)

___ 7. Obligations arising from the purchase of materials on July 5, 2018.  (Bankruptcy petition filed July 14, 2018).

___ 8. Fees charged by bankruptcy trustee.

___ 9. Inventory valued at $61,895 collateralizing a note payable to a bank in the amount of $56,982.

___ 10. Delivery trucks valued at $389,900 securing a lien by General Motors for $400,000.

Answer: (1) B; (2) C; (3) D; (4) B; (5) A; (6) B; (7) A; (8) B; (9) D; (10) C

Learning Objective: 13-04

Topic: Classification of creditors

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AICPA BB: Legal    

AICPA: BB Resource Management

AICPA: FN Risk Analysis