Package Title: Test Bank Questions

Course Title: Advanced Accounting, 6e

Chapter Number: 10

Question type: Multiple Choice

1) A corporation that is unable to pay its debts as they become due is:

a) bankrupt.
b) overdrawn.
c) insolvent.
d) liquidating.

Answer: c

Question Title: Test Bank (Multiple Choice) Question 01

Difficulty: Easy
Learning Objective: 1 Distinguish between a Chapter 7 and a Chapter 11 bankruptcy.
Section Reference: 10.0

2) When a business becomes insolvent, it generally has three possible courses of action. Which of the
following is NOT one of the three possible courses of action?

a) The debtor and its creditors may enter into a contractual agreement, outside of formal bankruptcy
proceedings.
b) The debtor continues operating the business in the normal course of the day-to-day operations.
c) The debtor or its creditors may file a bankruptcy petition, after which the debtor is liquidated under
Chapter 7.
d) The debtor or its creditors may file a petition for reorganization under Chapter 11.

Answer: b

Question Title: Test Bank (Multiple Choice) Question 02

Difficulty: Easy
Learning Objective: 5 Describe contractual agreements that the debtor and its creditors may enter into
outside of formal bankruptcy proceedings to resolve the debtor’s insolvent position.
Section Reference: 10.1

3) Assets transferred by the debtor to a creditor to settle a debt are transferred at:

a) book value of the debt.

b) book value of the transferred assets.
c) fair market value of the debt.
d) fair market value of the transferred assets.

Answer: d

Question Title: Test Bank (Multiple Choice) Question 03

Difficulty: Easy
Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.
Section Reference: 10.4

4) A composition agreement is an agreement between the debtor and its creditors whereby the creditors
agree to:

a) accept less than the full amount of their claims.

b) delay settlement of the claim until a later date.
c) force the debtor into a liquidation.
d) accrue interest at a higher rate.

Answer: aPr

Question Title: Test Bank (Multiple Choice) Question 04

Difficulty: Easy
Learning Objective: 5 Describe contractual agreements that the debtor and its creditors may enter into
outside of formal bankruptcy proceedings to resolve the debtor’s insolvent position.
Section Reference: 10.1

5) 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 not equal the creditor’s gain on restructuring.
d) may not equal the creditor’s loss on restructuring.

Answer: d

Question Title: Test Bank (Multiple Choice) Question 05

Difficulty: Easy
Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.
Section Reference: 10.4

6) A bankruptcy petition filed by a firm is a:

a) chapter petition.
b) involuntary petition.
c) voluntary petition.
d) chapter 11 petition.

Answer: c

Question Title: Test Bank (Multiple Choice) Question 06

Difficulty: Easy
Learning Objective: 3 Distinguish between a voluntary and involuntary bankruptcy petition.
Section Reference: 10.2
7) When a bankruptcy court enters an “order for relief” it has:

a) accepted the petition.

b) dismissed the petition.
c) appointed a trustee.
d) started legal action against the debtor by its creditors.

Answer: a

Question Title: Test Bank (Multiple Choice) Question 7

Difficulty: Easy
Learning Objective: 3 Distinguish between a voluntary and involuntary bankruptcy petition.
Section Reference: 10.2

8) An involuntary petition filed by a firm’s creditors whereby there are twelve or more creditors must be
signed by at least:

a) two creditors.
b) three creditors.
c) five creditors.
d) six creditors.

Answer: b

Question Title: Test Bank (Multiple Choice) Question 08

Difficulty: Easy
Learning Objective: 3 Distinguish between a voluntary and involuntary bankruptcy petition.
Section Reference: 10.2

9) The duties of the trustee include:

a) appointing creditors’ committees in liquidation cases.

b) approving all payments for debts incurred before the bankruptcy filing.
c) examining claims and disallowing any that are improper.
d) calling a meeting of the debtor’s creditors.

Answer: c

Question Title: Test Bank (Multiple Choice) Question 09

Difficulty: Easy
Learning Objective: 1 Distinguish between a Chapter 7 and a Chapter 11 bankruptcy.

Section Reference: 10.3

10) Which of the following items is NOT a specified priority for unsecured creditors in a bankruptcy
petition?
a) Administration fees incurred in administering the bankrupt’s estate.
b) Unsecured claims for wages earned within 90 days and are less than $4,650 per employee.
c) Unsecured claims of governmental units for unpaid taxes.
d) Unsecured claims on credit card charges that do not exceed $3,000.

Answer: d

Question Title: Test Bank (Multiple Choice) Question 10

Difficulty: Medium
Learning Objective: 2 Describe the five priority categories of unsecured claims and list the order in which
they are settled.
Section Reference: 10.2

11) Which statement with respect to gains and losses on troubled debt restructuring is correct?

a) Creditors losses on restructuring are extraordinary.

b) Debtor’s gains and losses on asset transfers and debtor’s gains on restructuring are combined and treated
as extraordinary.
c) Debtor gains and creditor losses on restructuring are extraordinary, if material in amount.
d) Debtor losses on asset transfers and debtor gains on restructuring are reported as a component of net
income.

Answer: d

Question Title: Test Bank (Multiple Choice) Question 11

Difficulty: Medium
Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.
Section Reference: 10.4

12) When fresh-start reporting is used according to Statement of Position (SOP) 90-7 (now incorporated in
FSB ASC topic 852), the implication is that a new firm exists. Which of the following statements is NOT
correct about fresh-start accounting?

a) Assets are reported at fair values.

b) Beginning retained earnings is reported at zero.
c) The fair value of the assets must be less than the post liabilities and allowed claims.
d) The original owners must own less than 50% of the voting stock after reorganization.

Answer: c

Question Title: Test Bank (Multiple Choice) Question 12

Difficulty: Medium
Learning Objective: 1 Distinguish between a Chapter 7 and a Chapter 11 bankruptcy.
Section Reference: 10.4

13) A Statement of Affairs is a report designed to show:

a) an estimated amount that would be received by each class of creditor’s claims in the event of liquidation.
b) a balance sheet prepared on the going-concern assumption.
c) assets and liabilities classified as current and noncurrent.
d) assets and liabilities reported at their current book values.

Answer: a

Question Title: Test Bank (Multiple Choice) Question 13

Difficulty: Easy
Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.
Section Reference: 10.4

14) When a secured claim is not fully settled by the selling of the underlying collateral, the remaining
portion:

a) of the claim cannot be collected by the creditor.

b) remains as a secured claim.
c) is classified as an unsecured priority claim.
d) is classified as an unsecured nonpriority claim.

Answer: d

Question Title: Test Bank (Multiple Choice) Question 14

Difficulty: Medium
Learning Objective: 4 Distinguish among fully secured, partially secured, and unsecured claims of creditors.
Section Reference: 10.2

15) Lyme Corporation entered into a troubled debt restructuring agreement with their local bank. The bank
agreed to accept land with a carrying amount of $360,000 and a fair value of $540,000 in exchange for a
note with a carrying amount of $765,000. Ignoring income taxes, what amount should Lyme report as a gain
on its income statement?

a) $0.
b) $180,000.
c) $225,000.
d) $405,000.

Answer: c

Question Title: Test Bank (Multiple Choice) Question 15

Difficulty: Medium
Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.
Section Reference: 10.4

16) The following information pertains to the transfer of real estate in regards to a troubled debt
restructuring by North Co. to Bell Co. in full settlement of North’s liability to Bell:

Carrying amount of liability settled $450,000

Carrying amount of real estate transferred $300,000
 Fair value of real estate transferred $330,000

What amount should North report as ordinary gain (loss) on transfer of real estate?

a) $(30,000).
b) $30,000.
c) $120,000.
d) $150,000.

Answer: b

Question Title: Test Bank (Multiple Choice) Question 16

Difficulty: Medium
Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.
Section Reference: 10.4

17) The following information pertains to the transfer of real estate in regards to a troubled debt
restructuring by North Co. to Bell Co. in full settlement of North’s liability to Bell:

Carrying amount of liability settled $450,000

Carrying amount of real estate transferred $300,000
Fair value of real estate transferred $330,000

What amount should Bell report as a gain or (loss) on restructuring?

a) $120,000 ordinary loss.

b) $120,000 extraordinary loss.
c) $150,000 ordinary loss.
d) $150,000 extraordinary loss.

Answer: a

Question Title: Test Bank (Multiple Choice) Question 17

Difficulty: Medium
Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.
Section Reference: 10.4

18) Dobby Corporation was forced into bankruptcy and is in the process of liquidating assets and paying
claims. Unsecured claims will be paid at the rate of thirty cents on the dollar. Carson holds a note receivable
from Dobby for $75,000 collateralized by an asset with a book value of $50,000 and a liquidation value of
$25,000. The amount to be realized by Carson on this note is:

a) $25,000.
b) $40,000.
c) $50,000.
d) $75,000.

Answer: b
Question Title: Test Bank (Multiple Choice) Question 18
Difficulty: Medium
Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.
Section Reference: 10.4

19) Splat Company filed a voluntary bankruptcy petition, and the statement of affairs reflected the following
amounts:
Estimated Book Value Current Value
Assets
Assets pledged with fully secured creditors $ 900,000 $ 1,110,000
Assets pledged partially secured creditors 540,000 360,000
Free assets 1,260,000 960,000
$2,700,000 $2,430,000
Liabilities
Liabilities with priority $ 210,000
Fully secured creditors 780,000
Partially secured creditors 600,000
Unsecured creditors 1,620,000
$3,210,000

Assume the assets are converted to cash at their estimated current values. What amount of cash will be
available to pay unsecured nonpriority claims?

a) $720,000.
b) $840,000.
c) $960,000.
d) $1,080,000.

Answer: d

Question Title: Test Bank (Multiple Choice) Question 19

Difficulty: Hard
Learning Objective: 4 Distinguish among fully secured, partially secured, and unsecured claims of creditors.
Section Reference: 10.2

20) The final settlement with unsecured creditors is computed by dividing:

a) total net realizable value by total unsecured creditor claims.

b) net free assets by total secured creditor claims.
c) total net realizable value by total secured creditor claims.
d) net free assets by total unsecured creditor claims.

Answer: d

Question Title: Test Bank (Multiple Choice) Question 20

Difficulty: Easy
Learning Objective: 4 Distinguish among fully secured, partially secured, and unsecured claims of creditors.
Section Reference: 10.2
21) Ford Corporation entered into a troubled debt restructuring agreement with their local bank. The bank
agreed to accept land with a carrying value of $200,000 and a fair value of $300,000 in exchange for a note
with a carrying amount of $425,000. Ignoring income taxes, what amount should Ford report as a gain on its
income statement?

a) $0.
b) $100,000.
c) $125,000.
d) $225,000.

Answer: c

Question Title: Test Bank (Multiple Choice) Question 21

Difficulty: Medium
Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.
Section Reference: 10.4

22) The following information pertains to the transfer of real estate in regards to a troubled debt
restructuring by MSG Co. to Beta Co. in full settlement of MSG’s liability to Beta:

Carrying amount of liability settled $375,000

Carrying amount of real estate transferred $250,000
Fair value of real estate transferred $275,000

What amount should MSG report as ordinary gain (loss) on transfer of real estate?

a) $(25,000).
b) $25,000.
c) $100,000.
d) $125,000.

Answer: b

Question Title: Test Bank (Multiple Choice) Question 22

Difficulty: Medium
Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.
Section Reference: 10.4

23) The following information pertains to the transfer of real estate in regards to a troubled debt
restructuring by MSG Co. to Beta Co. in full settlement of MSG’s liability to Beta:

Carrying amount of liability settled $375,000

Carrying amount of real estate transferred $250,000
Fair value of real estate transferred $275,000

What amount should Beta report as a gain or (loss) on restructuring?

a) $100,000 ordinary loss.

b) $100,000 extraordinary loss.
c) $125,000 ordinary loss.
d) $125,000 extraordinary loss.

Answer: a

Question Title: Test Bank (Multiple Choice) Question 23

Difficulty: Easy
Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.
Section Reference: 10.4

24) Poor Company filed a voluntary bankruptcy petition, and the settlement of affairs reflected the following
amounts:

Estimated Book Value Current Value

Assets
Assets pledged with fully secured creditors $ 450,000 $ 555,000
Assets pledged partially secured creditors 270,000 180,000
Free assets 630,000 480,000
$1,350,000 $1,215,000
Liabilities
Liabilities with priority $ 105,000
Fully secured creditors 390,000
Partially secured creditors 300,000
Unsecured creditors 810,000
$1,605,000

Assume the assets are converted to cash to their estimated current values. What amount of cash will be
available to pay unsecured nonpriority claims?

a) $360,000.
b) $420,000.
c) $480,000.
d) $540,000.

Answer: d

Question Title: Test Bank (Multiple Choice) Question 24

Difficulty: Hard
Learning Objective: 4 Distinguish among fully secured, partially secured, and unsecured claims of creditors.
Section Reference: 10.4

25) Tangent Corporation was forced into bankruptcy and is in the process of liquidating assets and paying
claims. Unsecured claims will be paid at the rate of thirty cents on the dollar. Arrow holds a note receivable
from Tangent for $90,000 collateralized by an asset with a book value of $60,000 and a liquidation value of
$30,000. The amount to be realized by Arrow on this note is:

a) $30,000.
b) $48,000.
c) $60,000.
d) $90,000.

Answer: b

Question Title: Test Bank (Multiple Choice) Question 25

Difficulty: Medium
Learning Objective: 4 Distinguish among fully secured, partially secured, and unsecured claims of creditors.
Section Reference: 10.2

Question Type: Essay

26) The Bankruptcy Reform Act assigns priorities to certain unsecured claims, and each rank must be
satisfied in full before the next–lower rank is paid. Identify the five categories of unsecured creditor claims.

Answer: The five categories of unsecured creditor claims are:

 Administration expenses and fees incurred in administering the bankrupt’s estate.
 Unsecured claims for wages and salaries earned within 90 days before the date of filing of the
petition.
 Unsecured claims for contributions to employee benefit plans from services provided within 180
days before the date of filing of the petition.
 Unsecured claims of individuals arising from deposits for the purchase, lease, or rental of property
or services that were not delivered.
 Unsecured claims of governmental units for unpaid taxes.

Question Title: Test Bank (Essay) Question 26

Difficulty: Medium
Learning Objective: 2 Describe the five priority categories of unsecured claims and list the order in which
they are settled.
Section Reference: 10.2

27) Creditors are classified by law as either secured or unsecured. Distinguish among fully secured, partially
secured, and unsecured creditors.

Answer: Fully secured creditor claims are those with liens against assets whose realizable value is equal to
or in excess of the claim. Partially secured claims are those with liens against assets whose realizable value
is less than the amount of the claim. Unsecured creditors are paid from whatever proceeds remain from the
realization process.

Question Title: Test Bank (Essay) Question 27

Difficulty: Easy
Learning Objective: 4 Distinguish among fully secured, partially secured, and unsecured claims of creditors.
Section Reference: 10.2

28) On January 1, 2017, Deal Mart owed Money Bank $1,600,000, under an 8% note with three years
remaining to maturity. Due to financial difficulties, Deal Mart was unable to pay the previous year’s interest.
Money Bank agreed to settle Deal Mart’s debt in exchange for land having a fair market value of
$1,310,000. Deal Mart purchased the land in 2003 for $1,000,000.

Required:
Prepare the journal entries to record the restructuring of the debt by Deal Mart.

Answer:
Land 310,000
Gain on Disposal of Land 310,000

Note Payable 1,600,000

Interest Payable 128,000
Land 1,310,000
Gain on Debt Restructuring 418,000

Question Title: Test Bank (Problem) Question 10-1

Difficulty: Medium
Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.
Section Reference: 10.4

29) On January 1, 2016, Terminator, Inc. owed 9th National Bank $12 million on a 10% note due December
31, 2017. Interest was last paid on December 31, 2015. Terminator was experiencing severe financial
difficulties and asked 9th National Bank to modify the terms of the debt agreement. After negotiation 9th
National Bank agreed to:
- Forgive the interest accrued for the year just ended,
- Reduce the remaining two years interest payments to $900,000 each and delay the first
payment until December 31, 2017, and
- Reduce the unpaid principal amount to $9,600,000.

Required:
Prepare the journal entries for Terminator, Inc. necessitated by the restructuring of the debt at (1) January 1,
2016, (2) December 31, 2017, and (3) December 31, 2015.

Answer:
Carrying amount: $12,000,000 + $1,200,000 = $13,200,000
Future payments: ($900,000 × 2) + 9,600,000 = 11,400,000
Gain to debtor/Loss to creditor $ 1,800,000

January 1, 2016

Interest Payable 1,200,000

Note Payable 600,000
Gain on Debt Restructuring 1,800,000

December 31, 2017

Note Payable 900,000

Cash 900,000

December 31, 2018

 Note Payable 900,000
Cash (Interest) 900,000
Note Payable 9,600,000
Cash (Principal) 9,600,000

Question Title: Test Bank (Problem) Question 10-2

Difficulty: Hard
Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.
Section Reference: 10.4

30) On January 2, 2017 Cretin Co., was indebted to Fourth National Bank under a $12 million, 10%
unsecured note. The note was signed January 2, 2015, and was due December 31, 2020. Annual interest was
last paid on December 31, 2015. Cretin Co. negotiated a restructuring of the terms of the debt agreement due
to financial difficulties.

Required:
Prepare all journal entries for Cretin Co., to record the restructuring and any remaining transactions relating
to the debt under each independent assumption.

A. Fourth National Bank agreed to settle the debt in exchange for land which cost Cretin Co. $8,500,000 and
has a fair market value of $10,000,000.

B. Fourth National Bank agreed to (1) forgive the accrued interest from last year (2) reduce the remaining
four interest payments to $600,000 each, and (3) reduce the principal to $9,000,000.

Answer:
A. January 2, 2017
Land 1,500,000
Gain on Disposal of Land 1,500,000

Interest Payable 1,200,000

Note Payable 12,000,000
Land 10,000,000
Gain on Debt Restructuring 3,200,000

B. Carrying amount $12,000,000 + $1,200,000 = $13,200,000

Future payments ($600,000 × 4) + $9,000,000 = 11,400,000
Gain to debtor/Loss to creditor $ 1,800,000

January 2, 2017
Interest Payable 1,200,000
Note Payable 600,000
Gain on Debt Restructuring 1,800,000

December 31, 2017, 2018, 2019, 2020

Note Payable (Interest) 600,000
Cash 600,000

December 31, 2020

 Note Payable 9,000,000
Cash 9,000,000

Question Title: Test Bank (Problem) Question 10-3

Difficulty: Hard
Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.
Section Reference: 10.4

31) On December 31, 2017, Pilot’s Credit Union agreed to restructure a $900,000, 8% loan receivable from
Norma Corporation because of Norma’s financial problems. At December 31 there was $36,000 of accrued
interest for a six-month period. Terms of the restructuring agreement are as follows:
- Reduce the loan from $900,000 to $600,000;
- Extend the maturity date by 2 years from December 31, 2017 to December 31, 2019;
- Reduce the interest rate on the loan from 8% to 6%.

Present value assumptions:

Present value of $1 for 2 years at 6% = 0.8900
Present value of $1 for 2 years at 8% = 0.8573
Present value of an ordinary annuity of $1 for 2 years at 6% = 1.8334
Present value of an ordinary annuity of $1 for 2 years at 8% = 1.7833

Required:
Compute the gain or loss that will be reported by Pilot’s Credit Union.

Answer:
Carrying value of the loan before restructuring $936,000
Present value of $600,000 due in 2 years at 8%
historical rate: ($600,000 × 0.8573) = $514,380
Present value of $36,000 interest for 2 years at
8% historical rate: ($36,000 × 1.7833) = 64,199
Carrying value of the loan $578,579 (578,579)
Loss on restructuring $357,421

Question Title: Test Bank (Problem) Question 10-4

Difficulty: Hard
Learning Objective: 6 Describe the ways debt may be restructured in a reorganization.
Section Reference: 10.4

32) O’Donnell Corporation incurred major losses in 2016 and entered into voluntary Chapter 7 bankruptcy
in the early part of 2017. By June 1, all assets were converted into cash, the secured creditors were paid, and
$150,000 in cash was left to pay the remaining claims as follows.

Accounts payable $ 48,000

Claims prior to the trustee’s appointment 21,000
Property taxes payable 18,000
Wages payable (all under $4,650 per employee) 54,000
Unsecured note payable 60,000
 Accrued interest on the note payable 6,000
Administrative expenses of the trustee 30,000
Total $237,000

Required:
Classify the claims by their Chapter 7 priority ranking, and analyze which amounts will be paid and which
amounts will be written off.

Answer:
Unsecured priority claims:
Claim To be Cash
Amount Paid Left
$150,000
Administrative expenses $30,000 $30,000 120,000
Claims prior to the trustee’s appointment 21,000 21,000 99,000
Wages payable 54,000 54,000 45,000
Property taxes payable 18,000 18,000 27,000

Unsecured Nonpriority Claims:

Claim To be Written
Amount Paid Off

Accounts payable $ 48,000 $12,000* $36,000

Unsecured note 60,000 15,000** 45,000
Accrued interest on the note 6,000 0 6,000

$27,000 / ($48,000 + $60,000) = .25

* $48,000 × 0.25 = $12,000

**$60,000 × 0.25 = $15,000

Question Title: Test Bank (Problem) Question 10-5

Difficulty: Medium
Learning Objective: 4 Distinguish among fully secured, partially secured, and unsecured claims of creditors.
Section Reference: 10.2

33) Down Dog Corporation filed a petition under Chapter 7 of the U.S. Bankruptcy Act on June 30, 2017.
Data relevant to its financial position as of this date are:
Estimated Net
Book Value Realizable Values
Cash $ 3,000 $ 3,000
Accounts receivable-net 72,000 48,000
Inventories 60,000 72,000
Equipment-net 165,000 87,000
Total assets $300,000 $210,000

Accounts payable $ 72,000

Rent payable 21,000
Wages payable 45,000
Note payable plus accrued interest 96,000
Capital stock 180,000
Retained earnings (deficit) (120,000)
Total liabilities and equity $300,000

Required:
A. Prepare a statement of affairs assuming that the note payable and interest are secured by a mortgage on
the equipment and that wages are less than $4,650 per employee.
B. Estimate the amount that will be paid to each class of claims if priority liquidation expenses including
trustee fees are $24,000 and estimated net realizable values are actually realized.

Answer:
A.
Down Dog Corporation
Statement of Affairs
June 30, 2017

Deficiency
Account
Book Value Assets Realizable Value (Loss/Gain)
Pledged with partially secured creditors
$165,000
Equipment-net $87,000 (78,000)
Less: Note payable and accrued interest (96,000)
Unsecured amount (See below) (9,000)

Free Assets
3,000
Cash 3,000
72,000
Accounts receivable-net 48,000 (24,000)
60,000
Inventories 72,000 12,000
Total net realizable value 123,000
Less: Priority liabilities – wages payable <45,000>
Total available for unsecured creditors 78,000
______ Estimated deficiency to unsecured creditors 30,000 ______
$300,000
$108,000 (90,000)

Unsecured
Book Value Equities Liabilities

Priority liabilities
$ 45,000
Wages payable (assumed under
$4,650 per employee) $ 45,000

Partially secured creditors

 96,000
Note payable and accrued interest $ 96,000
Less: Equipment pledged as security (87,000) $ 9,000

Unsecured creditors
72,000
Accounts payable 72,000
27,000
Rent payable 27,000

Stockholders’ equity
180,000
Capital stock 180,000
(120,000)
Retained earnings (deficit) ______ (120,000)
$300,000
$108,000 $ 60,000
Estimated Deficiency $(30,000)

B. Estimated payments per dollar for unsecured creditors

Cash available $210,000

Distribution to partially secured and unsecured priority creditors:

Note payable and interest $87,000
Administrative expenses 24,000
Wages payable 45,000 < 156,000>
Available to unsecured nonpriority creditors $ 54,000

Note payable and interest (unsecured portion) $ 9,000

Accounts payable 72,000
Rent payable 27,000

Unsecured nonpriority claims $108,000

($54,000 / $108,000 = $0.50 per dollar)

Partially secured
Note payable and interest
Secured portion $87,000
Unsecured portion ($9,000 × 0.50) 4,500 $91,500

Unsecured priority
Administrative expenses $24,000
Wages payable 45,000 69,000

Unsecured nonpriority
Accounts payable ($72,000 × 0.50 $36,000
Rent payable ($27,000 × 0.50) 13,500 49,500
Total payments $210,000
Question Title: Test Bank (Problem) Question 10-6
Difficulty: Hard
Learning Objective: 1 Distinguish between a Chapter 7 and a Chapter 11 bankruptcy., 4 Distinguish among
fully secured, partially secured, and unsecured claims of creditors., 6 Describe the ways debt may be
restructured in a reorganization.
Section Reference: 10.4

34) The following data are taken from the statement of affairs of Motor Sports Company.

Assets pledged with fully secured creditors

(Realizable value, $635,000) $800,000
Assets pledged with partially secured creditors
(realizable value, $300,000) 365,000
Free assets (Realizable value, $340,000) 535,000
Fully secured creditor claims 316,000
Partially secured creditor claims 400,000
Unsecured creditor claims with priority 100,000
General unsecured creditor claims 1,165,000

Required:
Compute the amount that will be paid to each class of creditor.

Answer:
Realizable value of all assets ($635,000 + $300,000 + $340,000) $1,275,000
Allocated to:
Fully secured creditors (316,000)
Partially secured creditors (300,000)
Unsecured creditors with priority (100,000)
Remainder available to general unsecured creditors $559,000

Payment rate to general unsecured creditors

(Including balance due to partially secured creditors)
$559,000 / ($1,165,000 + ($400,000 - $300,000)) 44.2%

Realizable value of assets:

Assets pledged to fully secured creditors $635,000
Assets pledged to partially secured creditors 300,000
Free assets 340,000
Total realizable value $1,275,000

Amounts to be paid to:

Fully secured creditors $316,000
Partially secured creditors [$300,000 + (0.442 × $100,000)] 344,200
Unsecured creditors with priority 100,000
General unsecured creditors (0.442 × $1,165,000) 514,800*
Total $1,275,000

*Rounded $130
Question Title: Test Bank (Problem) Question 10-7
Difficulty: Medium
Learning Objective: 4 Distinguish among fully secured, partially secured, and unsecured claims of creditors.
Section Reference: 10.2

35) On February 1, 2017, Hillary Company filed a petition for reorganization under the bankruptcy statutes.
The court approved the plan on September 1, 2017, including the following provisions:

1. Accrued expenses of $21,930, representing priority items, are to be paid in full.

2. Hillary Company is to exchange accounts receivable in the face amount of $138,000 and an
allowance for uncollectible accounts of $29,200 for the full settlement of $198,600 owed on
open account to one of its major unsecured creditors. The estimated fair value of the
receivables is $104,000.
3. Unsecured creditors of open accounts amounting to $91,600 and paid 40 cents on the dollar
in full settlement.
4. Hillary Company’s only other major unsecured creditor agreed to a five-year extension of
the $500,000 principal owed him on a 10% note payable. Accrued interest on the note on
September 1, 2017, amounts to $45,000, one-third of which is to be paid in cash and the
remainder canceled. In addition, no interest is to be charged during the remaining five years
to maturity of the note.

Required:
Prepare journal entries on the books of Hillary Company to give effect to the preceding provisions.

Answer:

1. Accrued Expenses 21,930

Cash 21,930

2. Allowance for Uncollectible Accounts 29,200

Loss on Transfer of Assets 4,800
Accounts Receivable ($138,000 - $104,000) 34,000

Accounts Payable 198,600

Accounts Receivable 104,000
Gain on Restructuring of Debt ($198,600 - $104,000) 94,600

3. Accounts Payable 91,600

Cash ($91,600 × 0.40) 36,640
Gain on Restructuring of Debt 54,960

4. Notes Payable 500,000

Accrued Interest Payable 45,000
Cash 15,000
Restructured Debt 500,000
Gain on Restructuring of Debt ($545,000 - $515,000) 30,000

Question Title: Test Bank (Problem) Question 10-8

Difficulty: Hard
Learning Objective: 4 Distinguish among fully secured, partially secured, and unsecured claims of
creditors., 6 Describe the ways debt may be restructured in a reorganization.
Section Reference: 10.2