Deck 18: Corporate Liquidations and Reorganizations

Question 1

Which condition must be met for fresh-start reporting for an emerging company from Chapter 11?

A)Holders of existing voting shares immediately before confirmation of the reorganization plan must receive more than fifty percent of the emerging entity.
B)The loss of control by voting shareholders must be temporary.
C)The reorganization value of the emerging entity's assets immediately before the date of the confirmation of the reorganization plan must be less than the total of all postpetition liabilities and allowed claims.
D)The fresh-start entity must have a deficit.

Answer 1

C

Question 2

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 a 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.

Answer 2

A

Question 3

In a Chapter 7 bankruptcy case,what is the first-to-last ranking order of priority for payment? (Use the following list of claim types.)
I.stockholder claims
II. unsecured priority claims
III. secured claims
IV. unsecured nonpriority claims

A)I,II,IV,and III
B)III,II,IV,and I
C)III,I,IV,and II
D)II,IV,III,and I

Answer 3

III,II,IV,and I

Question 4

Chapter 7 bankruptcy cases differ from Chapter 11 bankruptcy cases because Chapter 7 bankruptcy

A)is involuntary.
B)requires a reorganization plan that is approved by the court.
C)requires the debtor corporation to file a list of creditors,schedule of assets and liabilities,and work with a trustee.
D)leads to full liquidation of the bankrupt company.

Question 5

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.

Question 6

An entity which qualified for fresh-start accounting is not required to disclose which of the following items in their initial financial statements?

A)Adjustments from historical cost of assets and liabilities
B)Amount of debt of the prior entity forgiven
C)Amount of ending retained earnings/deficit of the prior entity
D)Changes to the management team from the prior entity

Question 7

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)issuing an order of relief.

Question 8

Which of the following does not occur for a trustee in a Chapter 7 bankruptcy case?

A)Gains and losses on the sale of assets are debited to the estate equity account.
B)Unrecorded liabilities discovered by the trustee are debited to the estate equity account and credited to the liability account.
C)Liquidation expenses are debited to the estate equity account.
D)An income statement is prepared showing gains and losses on sale of assets.

Question 9

A company emerging from bankruptcy will have a reorganization value that

A)approximates the book value of the entity's assets prior to bankruptcy.
B)approximates the book value of the entity prior to bankruptcy.
C)approximates the fair market value of the entity without considering liabilities.
D)approximates the fair market value of the entity's liabilities.

Question 10

A bankruptcy petition filed by a firm's creditors is

A)a Chapter 2 petition.
B)a petition for liquidation.
C)an involuntary petition.
D)a voluntary petition.

Question 11

In a Chapter 11 case,the debtor corporation filing the petition may continue in possession of the corporation's property,and is referred to as a(n)

A)examiner.
B)trustee.
C)liquidator.
D)debtor in possession.

Question 12

In a liquidation under Chapter 7,the trustee

A)may not be appointed,but may only be elected.
B)may not be elected,but may only be appointed.
C)is responsible for converting assets to cash and distributing payments to claimants.
D)is responsible for appointing a creditors' committee.

Question 13

When the bankruptcy court grants an order for relief under Chapter 7,

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.

Question 14

A petition commencing a case against a corporate debtor

A)can be filed only under Chapter 7 of the bankruptcy act.
B)can be filed only under Chapter 11 of the bankruptcy act.
C)can be filed under either Chapter 7 or Chapter 11 of the bankruptcy act.
D)will be determined by the trustee whether it shall be Chapter 7 or Chapter 11 of the bankruptcy act.

Question 15

A single creditor

A)can never file a petition for bankruptcy.
B)with a $15,775 or more secured claim may file a petition for bankruptcy.
C)with a $15,775 or more unsecured claim may file a petition for bankruptcy,if there are fewer than 12 unsecured creditors.
D)with a $14,425 or more unsecured claim may file a petition for bankruptcy if there are more than 12 unsecured creditors.

Question 16

Which of the following must approve a Chapter 11 plan?

A)The organization's management and the assigned trustee
B)The assigned trustee and creditors
C)The assigned trustee and entity's stockholders
D)The bankruptcy court and the creditors

Question 17

What is an advantage of filing a Chapter 11 petition?

A)The continuation of interest accrual on liabilities
B)Restrictions imposed by the bankruptcy court on day-to-day transactions
C)It is less costly than filing Chapter 7.
D)The opportunity to cancel unfavorable contracts

Question 18

When a corporation's total liabilities are greater than the fair value of total assets,the firm is

A)a distressed corporation.
B)a bankrupt corporation.
C)insolvent in the equity sense.
D)insolvent in the bankruptcy sense.

Question 19

Fresh-start reporting results in

A)a new reporting entity with no retained earnings/deficit balance.
B)a new reporting entity with a retained earnings/deficit balance equal to the reorganization value.
C)a continuation of the reorganized organization with no retained earnings/deficit balance.
D)a continuation of the reorganized organization with a retained earnings/deficit balance equal to the reorganization value.

Question 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? The forgiveness of debt is reported as

A)an operating gain.
B)a non-operating gain.
C)an extraordinary item.
D)an increase in contributed capital.

Question 21

Pasten Corporation is liquidating under Chapter 7 of the Bankruptcy Act.The accounts of Pasten at the time of filing are summarized as follows:
The land and building are pledged as security for the mortgage payable as well as any accrued interest on the mortgage.Wages and salaries were earned within 90 days of filing the bankruptcy petition and do not exceed $10,000 per employee.Liquidation expenses are expected to be $35,000.
Required:
1.Prepare a schedule showing the priority rankings of the creditors and the expected payouts.
2.Yuomi Corporation was a supplier to Pasten Corporation and at the time of Pasten's bankruptcy filing,Yuomi's account receivable from Pasten was $500,000.On the basis of the estimates,how much can Yuomi expect to receive?

Question 22

Oceana Corporation is being liquidated under Chapter 7 of the Bankruptcy Act.The trustee has determined that the unsecured claims will receive $.35 on the dollar.Loans-R-Us holds a $1,000,000 mortgage note receivable from Oceana that is secured by building and equipment with a $1,200,000 book value and a $900,000 fair value.
Required:
How much of the mortgage receivable will Loans-R-Us recover?

Question 23

Ending 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 $80,000 cash (which includes the amounts shown below for assets sold)and has prepared the following list of approved claims:
Note payable to bank,secured by all accounts receivable of which $20,000
Required:
How much will the bank receive on the note payable?

Question 24

Finale 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 $180,000 cash and has prepared the following list of approved claims:
Customer deposits ($1,000 from each of three customers
Note payable to bank,secured by all accounts receivable of which $45,000
Required:
How much will the bank receive on the note payable?

Question 25

Dip Corporation is in a Chapter 11 bankruptcy reorganization.For each of the following transactions relating to the reorganization,show the journal entry that would be required by Dip.Assume that all unsecured liabilities were not reclassified to Prepetition Claims Subject to Compromise.
1.Dip has $200,000 in bonds payable which mature at the end of the current year.The bondholders agree to accept $100,000 of new common stock and $75,000 cash,payable immediately.
2.Accrued interest on the bonds recorded at $20,000 will not be paid.
3.Recorded patents in the amount of $15,000 are determined to be worthless and are written off.
4.Equipment recorded net at $24,000 is appraised at $30,000.
5.A building recorded net at $78,000 is appraised for $87,000.
6.Creditors owed $120,000 recorded in accounts payable are paid $96,000 in full settlement.
7.Property taxes and payroll taxes withheld are paid in full at $12,000.
8.A capital lease recorded at $48,000 is re-negotiated,and the resulting operating lease will require monthly lease payments of $500.
9.An unsecured bank note amounting to $180,000 will be exchanged for $120,000 note secured by the building and equipment.
10.Current stockholders will exchange their stock which has a current book value of $300,000 for $100,000 common stock of the new entity.

Question 26

Trustin Corporation is in a Chapter 7 bankruptcy liquidation.For each of the following transactions,show the journal entry that would be required by the trustee of the estate.
1.An electric bill is received for $1,000 which had not yet been recorded by Trustin.
2.Inventory recorded net at $18,000 is sold for $16,000 cash.
3.Recorded patents in the amount of $7,000 are determined to be worthless and are written off.
4.Equipment recorded net at $24,000 is sold for $20,000 cash.
5.A building recorded net at $78,000 is sold for $87,000 cash.
6.Trustee fees of $2,500 are accrued.
7.The fully secured mortgage is paid in the amount of $70,000.
8.Wages payable that were recorded in the amount of $9,000 are paid.
9.An equipment lease,which was recorded as prepaid equipment lease,is cancelled and a $1,500 refund is received.
10.Accounts receivable amounting to $12,000 are collected,and an additional $3,000 is determined to be uncollectible.

Question 27

Gonne Corporation is being liquidated under Chapter 7 of the Bankruptcy Act.The trustee has determined that the unsecured claims will receive $.35 on the dollar.Odemay Corporation holds a $100,000 mortgage note receivable from Gonne that is secured by equipment with a $120,000 book value and a $75,000 fair value.
Required:
How much of the mortgage receivable will be recovered by Odemay?

Question 28

Gargantuan Bank has loaned money in two separate loans to Little Company,which is now in Chapter 7 bankruptcy.Little Company has the following assets and liabilities,stated at fair value in liquidation.
Required:
Determine the amount of cash that Gargantuan will collect from these two pieces of debt.

Question 29

CommTex Corporation is liquidating under Chapter 7 of the Bankruptcy Act.The accounts of CommTex at the time of filing are summarized as follows:
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 earned within 90 days of filing the petition for bankruptcy and pension plan contributions relate to services rendered within 6 months of filing the petition for bankruptcy; neither exceeds $4,000 per employee.Liquidation expenses are expected to be $40,000.
Required:
1.Prepare a schedule showing the priority rankings of the creditors and the expected payouts.
2.Devendor Corporation was a supplier to CommTex Corporation and at the time of CommTex's bankruptcy filing,Devendor's account receivable from CommTex was $25,000.On the basis of the estimates,how much can Devendor expect to receive?

Question 30

Hilfmir Corporation filed for Chapter 11 bankruptcy on January 1,2014.A summary of their financial status is shown below on June 30,2014,at the date of the approved reorganization,along with the fair value of their assets.
Under the reorganization plan,the reorganization value has been set at $320,000.Prepetition liabilities include $30,000 of trade Accounts Payable and a $220,000 Note Payable to Bigg Bank.The reorganization plan calls for the Prepetition accounts payable to be paid at 80% at a later date,and the Note Payable for $220,000 to be replaced by a Note Payable for $76,000 and the issuance of common stock of the new entity for $100,000.The former stockholders will receive $40,000 in common stock of the new entity,Hilfmir,in exchange for their shares.
Required:
Show the calculations to determine if Hilfmir is eligible for fresh-start accounting,and prepare a fresh-start balance sheet for the new entity,Hilfmir,as of July 1,2014.

Question 31

Lesher Corporation lost their primary contract and entered into voluntary Chapter 7 bankruptcy in the early part of 2014.By July 1,all assets were converted into cash,the secured creditors were paid,and $124,500 in cash was left to pay the remaining claims as follows:
Claims incurred between the date of filing an involuntary
Wages payable (all under $10,000 per employee; earned within
Required:
Classify the claims by their Chapter 7 priority ranking,and analyze which amounts will be paid and which amounts will be written off.

Question 32

Ohio Corporation is being liquidated under Chapter 7 of the Bankruptcy Act.The trustee has determined that the unsecured claims will receive $.05 on the dollar.Lender Bank holds a $100,000 mortgage note receivable from Ohio that is secured by equipment with a $120,000 book value and a $90,000 fair value,and a second mortgage on the same equipment amounting to $50,000.
Required:
How much of the mortgage receivable will be recovered by Lender?

Question 33

Alitech Corporation is liquidating under Chapter 7 of the Bankruptcy Act.The accounts of Alitech at the time of filing are summarized as follows:
The land and building are pledged as security for the mortgage payable as well as any accrued interest on the mortgage.Wages and salaries were earned within 90 days of filing the petition for bankruptcy and do not exceed $11,725 per employee.Liquidation expenses are expected to be $30,000.
Required:
1.Prepare a schedule showing the priority rankings of the creditors and the expected payouts.
2.Billing Corporation was a supplier to Alitech Corporation and at the time of Alitech's bankruptcy filing,Billing's account receivable from Alitech was $40,000.On the basis of the estimates,how much can Billing expect to receive?

Question 35

Rank the following claims 1 through 5,with 1 being the first priority claim,under Chapter 7 of the bankruptcy code.

Question 36

DeFunk Corporation is being liquidated under Chapter 7 of the Bankruptcy Act.The trustee has determined that the unsecured claims will receive $.18 on the dollar.Magma Corporation holds a $200,000 mortgage receivable from DeFunk that is secured by the land and buildings with a book value of $180,000 and a fair value of $190,000.Magma also holds an $80,000 unsecured note receivable from Defunk.Mortgage interest owed,which is secured with the mortgage note,is $4,000.Note interest owed,which is unsecured,is $2,000.
Required:
How much of the amounts owed will Magma recover?

Question 37

Moddle Corporation is being liquidated under Chapter 7 of the Bankruptcy Act.The trustee has determined that the unsecured claims will receive $.20 on the dollar.National Corporation holds a $500,000 mortgage note receivable from Moddle that is secured by equipment with a $550,000 book value and a $430,000 fair value.
Required:
How much of the mortgage receivable will National recover?

Question 38

Faled Company has the following assets and liabilities,stated at fair value in liquidation.
Required:
Determine the amount of cash that will be available to pay unsecured creditors,and the percentage of unsecured liabilities that will be paid.

Question 39

Kline Corporation incurred major losses in 2014 and entered into voluntary Chapter 7 bankruptcy in the early part of 2015.By July 1,all assets were converted into cash,the secured creditors were paid,and $122,700 in cash was left to pay the remaining claims as follows:
petition and the date an interim trustee is appointed
earned within 90 days of filing bankruptcy petition)
Required:
Classify the claims by their Chapter 7 priority ranking,and analyze which amounts will be paid and which amounts will be written off.

Question 40

Aqua Corporation filed a petition under Chapter 7 of the bankruptcy act in January,2014.On February 28,the following information was presented regarding Aqua's financial status.
$\begin{array}{llll}&\text { Book Values}&\text { Fair Values }\\\text { Cash } & \$ 50,000 \$ & 50,000 \\\text { A/R - net } & 100,000 & 90,000 \\\text { Inventories } & 80,000 & 60,000 \\\text { Fixed Assets - net } & 200,000 & 230,00\end{array}$ $$\begin{array} { l l } \text { Prionty Clains } & 80,000 \\\text { A/P } & 100,000 \\\text { N/P } & 110,000 \\\text { Mortgage Payable } & 200,000\end{array}$$ The Note Payable is secured by Accounts Receivable,and the Mortgage Payable is secured by the Fixed Assets.
Required:
Calculate the amount expected to be available for unsecured claims and the percentage recovery that the unsecured class should expect to receive.

Question 41

When total debts exceed the fair value of total assets it is referred to as equity insolvency.

Question 42

The doctrine of equitable subordination allows judges to move unsecured creditors ahead of secured creditors in bankruptcy proceedings in the interest of "fairness".

Question 43

The inability to make payments on time is equity insolvency.

Question 44

In the case of Chapter 7 Liquidation,the stockholders are the first to have their claims satisfied.

Question 45

An executory contract is one that has been completely performed but not settled in terms of payment.

Question 46

In cases of Chapter 11,a private trustee or a debtor in possession can be appointed to oversee the reorganization.

Question 47

Chapter 7 bankruptcy appoints a trustee to sell off the assets of the company and pay claims to its creditors.

Question 48

In the bankruptcy process a statement of affairs is prepared and filed by the trustee.The statement of affairs shows the income statement information.

Question 49

A statement of realization and liquidation is an activity statement that shows progress toward the liquidation of a debtor's estate.

Question 50

U.S.Trustees are appointed by the Attorney General to handle the administrative duties of bankruptcy cases.