Question 1

In a Chapter 11 reorganization, reorganization value is:

Accepted Answer

Reorganization value in a Chapter 11 reorganization is the fair value of the assets that will continue to be used in the reorganized entity's operations, as well as the fair value of any assets that will be sold.

Question 2

A company is emerging from reorganization under Chapter 11 of the bankruptcy laws. It has allowed prepetition liabilities of $3,000,000, postpetition liabilities of $400,000, and new equity interests valued at $100,000. For fresh start reporting to apply, the reorganization value of the company's assets must be:

Accepted Answer

Reorganization value must be less than the sum of the prepetition and postpetition liabilities; $3,000,000 + $400,000 = $3,400,000.

Question 3

In emerging from reorganization under Chapter 11 of the bankruptcy laws, a company issues new voting shares to creditors and prior shareholders. To qualify for fresh start reporting:

Accepted Answer

The answer of In emerging from reorganization under Chapter 11...

Question 4

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A company emerging from Chapter 11 reorganization has the following balance sheet:
 $$\begin{array} { | l | r | l | r | } 
\hline \text { Current assets } & \$ 150,000 & \text { Postpetition liabilities } & \$ 100,000 \
\hline \text { Noncurrent assets } & 900,000 & \text { Liabilities subject to compromise } & 1,000,000 \
\hline & & \text { Common tock } & 200,000 \
\hline & & \text { Retained deficit } & \{\$ 250,000 \} \
\hline \text { Total } & \$ 1,050,000 & \text { Total } & \$ 1,050,000 \
\hline
\end{array}$$ The plan of reorganization provides for the following:
• Estimated reorganization value is $750,000.
• Liabilities subject to compromise are replaced with $500,000 in notes payable and 60% of the new common stock issue.
• Existing shareholders receive 40% of the new stock issue.
• Noncurrent assets are written down by $300,000.
-The entry to record settlement of liabilities subject to compromise results in a gain on discharge of debt of:

Accepted Answer

The liabilities subject to compromise are $1,000,000. They are replaced with $500,000 in notes payable, which means the company is relieved of $500,000 of its debt obligations. However, the company also issues 60% of its new common stock to these creditors. The estimated reorganization value is $750,000, and since the creditors receive 60% of the new common stock, they get an additional value of 60% of $750,000, which is $450,000. The total value given to settle the $1,000,000 debt is $500,000 (in notes payable) + $450,000 (in stock), which equals $950,000. Therefore, the gain on discharge of debt is $1,000,000 (original debt) - $950,000 (value given to settle the debt) = $50,000. However, this calculation does not align with the provided options, indicating a misunderstanding in the explanation process. The correct calculation should focus on the reduction in liabilities without incorrectly adding the value of stock issued to the creditors, as the question asks specifically for the gain on discharge of debt, not the overall financial impact including equity considerations. Given the options and the context, the correct approach involves directly comparing the old liabilities to the new liabilities and equity issued without assigning a monetary value to the equity portion for this specific calculation.

Question 5

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A company emerging from Chapter 11 reorganization has the following balance sheet:
 $$\begin{array} { | l | r | l | r | } 
\hline \text { Current assets } & \$ 150,000 & \text { Postpetition liabilities } & \$ 100,000 \
\hline \text { Noncurrent assets } & 900,000 & \text { Liabilities subject to compromise } & 1,000,000 \
\hline & & \text { Common tock } & 200,000 \
\hline & & \text { Retained deficit } & \{\$ 250,000 \} \
\hline \text { Total } & \$ 1,050,000 & \text { Total } & \$ 1,050,000 \
\hline
\end{array}$$ The plan of reorganization provides for the following:
• Estimated reorganization value is $750,000.
• Liabilities subject to compromise are replaced with $500,000 in notes payable and 60% of the new common stock issue.
• Existing shareholders receive 40% of the new stock issue.
• Noncurrent assets are written down by $300,000.
-The entry to record restructuring of the interests of prior shareholders results in a credit to additional paid-in capital of:

Accepted Answer

The restructuring of the interests of prior shareholders involves allocating 40% of the new common stock issue to them. Given the estimated reorganization value is $750,000, and liabilities are replaced with $500,000 in notes payable, the equity value is $250,000 ($750,000 - $500,000 in notes payable). 40% of this equity value is $100,000 ($250,000 * 40%). Since the original common stock was $200,000 and the value allocated to prior shareholders is now $100,000, the difference of $100,000 is credited to additional paid-in capital. However, the retained deficit of $250,000 must also be considered. The restructuring would eliminate this deficit against the common stock and additional paid-in capital. Since the common stock is reduced to $100,000 (40% of the new equity), the remaining $150,000 ($250,000 deficit - $100,000 reduction in common stock) would be credited to additional paid-in capital, resulting in a total credit of $250,000 ($100,000 from the reduction in common stock value + $150,000 from eliminating the retained deficit). However, the correct calculation should focus on the restructuring entry itself without directly offsetting the retained deficit in this manner, leading to an error in the explanation. The correct approach involves directly calculating the impact on additional paid-in capital based on the restructuring agreement and the new stock issue, without subtracting the retained deficit in this step.

Question 6

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A company emerging from Chapter 11 reorganization has the following balance sheet:
 $$\begin{array} { | l | r | l | r | } 
\hline \text { Cash } & \$ 25,000 & \text { Postpetition liabilities } & \$ 200,000 \
\hline \text { Account s receivable } & 60,000 & \text { Liabilities subject to compromise } & 1,500,000 \
\hline \text { Inventories } & 400,000 & \text { Common stock } & 300,000 \
\hline \text { Plant and equipment, net } & \underline { 1,200,000 } & \text { Retained deficit } & \underline { \{ 315,000 \ } \
\hline \text { Total } & \$ \underline { \$ 1,685,000 } & \text { Total } & \$ 1,685,000 \
\hline
\end{array}$$ The plan of reorganization provides for the following:
• Estimated reorganization value is $1,300,000.
• Liabilities subject to compromise are replaced with $1,000,000 in notes payable and 80% of the new common stock issue.
• Existing shareholders receive 20% of the new stock issue
• Inventories and plant and equipment are written down to their fair values of $250,000 and $800,000, respectively.
• There are no previously unreported identifiable intangible assets.
-On the balance sheet immediately following emergence from reorganization, the common stock balance is:

Accepted Answer

The new common stock is issued to replace the old equity and is valued based on the reorganization value minus the new liabilities. The reorganization value is $1,300,000, and the new liabilities are $1,000,000 in notes payable. The equity value is $300,000, and since existing shareholders receive 20% of the new stock, the common stock balance is 20% of $300,000, which is $100,000.

Question 7

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A company emerging from Chapter 11 reorganization has the following balance sheet:
 $$\begin{array} { | l | r | l | r | } 
\hline \text { Cash } & \$ 25,000 & \text { Postpetition liabilities } & \$ 200,000 \
\hline \text { Account s receivable } & 60,000 & \text { Liabilities subject to compromise } & 1,500,000 \
\hline \text { Inventories } & 400,000 & \text { Common stock } & 300,000 \
\hline \text { Plant and equipment, net } & \underline { 1,200,000 } & \text { Retained deficit } & \underline { \{ 315,000 \ } \
\hline \text { Total } & \$ \underline { \$ 1,685,000 } & \text { Total } & \$ 1,685,000 \
\hline
\end{array}$$ The plan of reorganization provides for the following:
• Estimated reorganization value is $1,300,000.
• Liabilities subject to compromise are replaced with $1,000,000 in notes payable and 80% of the new common stock issue.
• Existing shareholders receive 20% of the new stock issue
• Inventories and plant and equipment are written down to their fair values of $250,000 and $800,000, respectively.
• There are no previously unreported identifiable intangible assets.
-On the balance sheet immediately following emergence from reorganization, goodwill is:

Accepted Answer

The answer of Use the following information to answer bellow...

Question 8

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A company emerging from Chapter 11 reorganization has the following balance sheet:
 $$\begin{array} { | l | r | l | r | } 
\hline \text { Cash } & \$ 25,000 & \text { Postpetition liabilities } & \$ 200,000 \
\hline \text { Account s receivable } & 60,000 & \text { Liabilities subject to compromise } & 1,500,000 \
\hline \text { Inventories } & 400,000 & \text { Common stock } & 300,000 \
\hline \text { Plant and equipment, net } & \underline { 1,200,000 } & \text { Retained deficit } & \underline { \{ 315,000 \ } \
\hline \text { Total } & \$ \underline { \$ 1,685,000 } & \text { Total } & \$ 1,685,000 \
\hline
\end{array}$$ The plan of reorganization provides for the following:
• Estimated reorganization value is $1,300,000.
• Liabilities subject to compromise are replaced with $1,000,000 in notes payable and 80% of the new common stock issue.
• Existing shareholders receive 20% of the new stock issue
• Inventories and plant and equipment are written down to their fair values of $250,000 and $800,000, respectively.
• There are no previously unreported identifiable intangible assets.
-The entry to record settlement of liabilities subject to compromise results in a gain on discharge of debt of:

Accepted Answer

The answer of Use the following information to answer bellow...

Question 9

Use the following information to answer bellow Questions
A company emerging from Chapter 11 reorganization has the following balance sheet:
 $$\begin{array} { | l | r | l | r | } 
\hline \text { Cash } & \$ 25,000 & \text { Postpetition liabilities } & \$ 200,000 \
\hline \text { Account s receivable } & 60,000 & \text { Liabilities subject to compromise } & 1,500,000 \
\hline \text { Inventories } & 400,000 & \text { Common stock } & 300,000 \
\hline \text { Plant and equipment, net } & \underline { 1,200,000 } & \text { Retained deficit } & \underline { \{ 315,000 \ } \
\hline \text { Total } & \$ \underline { \$ 1,685,000 } & \text { Total } & \$ 1,685,000 \
\hline
\end{array}$$ The plan of reorganization provides for the following:
• Estimated reorganization value is $1,300,000.
• Liabilities subject to compromise are replaced with $1,000,000 in notes payable and 80% of the new common stock issue.
• Existing shareholders receive 20% of the new stock issue
• Inventories and plant and equipment are written down to their fair values of $250,000 and $800,000, respectively.
• There are no previously unreported identifiable intangible assets.
-The entry to record restructuring of the interests of prior shareholders results in a credit to additional paid-in capital of:

Accepted Answer

The answer of Use the following information to answer bellow...

Question 10

Use the following information to answer bellow Questions
A company emerging from Chapter 11 reorganization has the following balance sheet:
 $$\begin{array} { | l | r | l | r | } 
\hline \text { Cash } & \$ 25,000 & \text { Postpetition liabilities } & \$ 200,000 \
\hline \text { Account s receivable } & 60,000 & \text { Liabilities subject to compromise } & 1,500,000 \
\hline \text { Inventories } & 400,000 & \text { Common stock } & 300,000 \
\hline \text { Plant and equipment, net } & \underline { 1,200,000 } & \text { Retained deficit } & \underline { \{ 315,000 \ } \
\hline \text { Total } & \$ \underline { \$ 1,685,000 } & \text { Total } & \$ 1,685,000 \
\hline
\end{array}$$ The plan of reorganization provides for the following:
• Estimated reorganization value is $1,300,000.
• Liabilities subject to compromise are replaced with $1,000,000 in notes payable and 80% of the new common stock issue.
• Existing shareholders receive 20% of the new stock issue
• Inventories and plant and equipment are written down to their fair values of $250,000 and $800,000, respectively.
• There are no previously unreported identifiable intangible assets.
-In the entry to record revaluation of assets, the loss on asset revaluation is:

Accepted Answer

The loss on asset revaluation is calculated by subtracting the new fair values of the inventories and plant and equipment from their book values. Inventories are written down from $400,000 to $250,000, a loss of $150,000. Plant and equipment are written down from $1,200,000 to $800,000, a loss of $400,000. The total loss on asset revaluation is $150,000 + $400,000 = $550,000.

Question 11

A company has 1,000 outstanding common shares with a $5/share par value, additional paid-in capital of $5,000, and a deficit of $6,500 in retained earnings. It reduces its assets by $2,000 to report them at fair value. To achieve a successful quasi-reorganization, the company must reduce the par value of its common shares by:

Accepted Answer

The deficit increases to $8,500 after the asset write-off. Since additional paid-in capital is $5,000, the common stock account must be reduced by $3,500 to absorb the deficit. There are 1,000 shares, so par must be reduced by $3,500/1,000 = $3.50/share.

Question 12

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Hopeful Company's balance sheet is as follows:
 $\begin{array}{|c|}\hline \text {Hopeful Company}\
\text {Balance Sheet, pre-quasi-reorganization}\
\begin{array} {  l | r | l | r }

\hline \text { Assets } & & \text { Liabilities and Equity } & \
\hline \text { Cash } & \$ 60,000 & \text { Loans payable } & \$ 1,220,000 \
\hline \text { Inyentories } & 550,000 & \text { Common stock, } \$ 10 \text { par } & 550,000 \
\hline \text { Property \{net\} } & 950,000 & \text { Additional paid-in capital } & 400,000 \
\hline & & \text { Retained earnings } & \{ 610,000 \} \
\hline \text { Total } & \$ 1,560,000 & \text { Total } & \$ 1,560,000 \
\hline
\end{array}\end{array}$ The company enters into a quasi-reorganization. Pursuant to this plan, inventories are written down by $50,000 and property is reduced by $180,000. The par value of the common stock is reduced to $2/share.
-After the quasi-reorganization, total assets are reported at:

Accepted Answer

The quasi-reorganization reduces the value of inventories by $50,000 and property by $180,000. The par value of the common stock is reduced to $2/share, which reduces the total equity by $480,000. Therefore, the total assets after the quasi-reorganization are $1,560,000 - $50,000 - $180,000 = $1,330,000.

Question 13

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Hopeful Company's balance sheet is as follows:
 $\begin{array}{|c|}\hline \text {Hopeful Company}\
\text {Balance Sheet, pre-quasi-reorganization}\
\begin{array} {  l | r | l | r }

\hline \text { Assets } & & \text { Liabilities and Equity } & \
\hline \text { Cash } & \$ 60,000 & \text { Loans payable } & \$ 1,220,000 \
\hline \text { Inyentories } & 550,000 & \text { Common stock, } \$ 10 \text { par } & 550,000 \
\hline \text { Property \{net\} } & 950,000 & \text { Additional paid-in capital } & 400,000 \
\hline & & \text { Retained earnings } & \{ 610,000 \} \
\hline \text { Total } & \$ 1,560,000 & \text { Total } & \$ 1,560,000 \
\hline
\end{array}\end{array}$ The company enters into a quasi-reorganization. Pursuant to this plan, inventories are written down by $50,000 and property is reduced by $180,000. The par value of the common stock is reduced to $2/share.
-At the completion of the quasi-reorganization process, the balance in additional paid-in capital is:

Accepted Answer

The quasi-reorganization involves writing down assets and reducing the par value of common stock. The write-downs total $230,000 ($50,000 for inventories and $180,000 for property). The reduction in common stock's par value from $10 to $2 per share affects the common stock and additional paid-in capital accounts. The original common stock value is $550,000 (based on a $10 par value). Reducing the par value to $2 per share means the new common stock value is $110,000 ($2 par value times the same number of shares). The difference of $440,000 ($550,000 original - $110,000 new value) is moved from common stock to additional paid-in capital. However, this amount is used to offset the write-downs of assets ($230,000), leaving additional paid-in capital at $0.

Question 14

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Hopeful Company's balance sheet is as follows:
 $\begin{array}{|c|}\hline \text {Hopeful Company}\
\text {Balance Sheet, pre-quasi-reorganization}\
\begin{array} {  l | r | l | r }

\hline \text { Assets } & & \text { Liabilities and Equity } & \
\hline \text { Cash } & \$ 60,000 & \text { Loans payable } & \$ 1,220,000 \
\hline \text { Inyentories } & 550,000 & \text { Common stock, } \$ 10 \text { par } & 550,000 \
\hline \text { Property \{net\} } & 950,000 & \text { Additional paid-in capital } & 400,000 \
\hline & & \text { Retained earnings } & \{ 610,000 \} \
\hline \text { Total } & \$ 1,560,000 & \text { Total } & \$ 1,560,000 \
\hline
\end{array}\end{array}$ The company enters into a quasi-reorganization. Pursuant to this plan, inventories are written down by $50,000 and property is reduced by $180,000. The par value of the common stock is reduced to $2/share.
-At the completion of the quasi-reorganization process, the balance in the common stock, $2 par account is:

Accepted Answer

The quasi-reorganization reduces the par value of the common stock from $10 to $2 per share. The original common stock amount is $550,000 at $10 par. When the par value is reduced to $2, the number of shares remains the same, but the value assigned to common stock is recalculated based on the new par value. Therefore, the new balance in the common stock account is $110,000, which is calculated by taking the original number of shares (found by dividing the original common stock amount by the original par value, $550,000 / $10 = 55,000 shares) and multiplying by the new par value ($2 * 55,000 = $110,000).

Question 15

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Hopeful Company's balance sheet is as follows:
 $\begin{array}{|c|}\hline \text {Hopeful Company}\
\text {Balance Sheet, pre-quasi-reorganization}\
\begin{array} {  l | r | l | r }

\hline \text { Assets } & & \text { Liabilities and Equity } & \
\hline \text { Cash } & \$ 60,000 & \text { Loans payable } & \$ 1,220,000 \
\hline \text { Inyentories } & 550,000 & \text { Common stock, } \$ 10 \text { par } & 550,000 \
\hline \text { Property \{net\} } & 950,000 & \text { Additional paid-in capital } & 400,000 \
\hline & & \text { Retained earnings } & \{ 610,000 \} \
\hline \text { Total } & \$ 1,560,000 & \text { Total } & \$ 1,560,000 \
\hline
\end{array}\end{array}$ The company enters into a quasi-reorganization. Pursuant to this plan, inventories are written down by $50,000 and property is reduced by $180,000. The par value of the common stock is reduced to $2/share.
-The balance in the retained earnings account following the quasi-reorganization is:

Accepted Answer

The balance in the retained earnings account following a quasi-reorganization is reset to $0. This process allows the company to eliminate its accumulated deficit by adjusting asset values and equity accounts.

Question 16

In a troubled debt restructuring, assets with a book value of $200,000 and a fair value of $180,000 are transferred in full settlement of a $250,000 debt. How is this reported?

Accepted Answer

The loss on asset disposition is calculated as the book value minus the fair value ($200,000 - $180,000 = $20,000). The gain on restructuring is the difference between the original debt and the fair value of the assets transferred ($250,000 - $180,000 = $70,000).

Question 17

A company owes the bank $1,020,000. Since the company cannot pay this debt, the bank agrees to allow the company to pay $950,000 in two years, plus interest annually at $48,000 per year. What is the gain on restructuring?

Accepted Answer

Total undiscounted payments = $950,000 + $48,000 + $48,000 = $1,046,000 > $1,020,000, so no gain is recorded.

Question 18

A company owes the bank $550,000. Since the company cannot pay this debt, the bank agrees to allow the company to pay $400,000 in two years, plus interest of $30,000 per year. What is the gain on restructuring?

Accepted Answer

Total undiscounted payments = $400,000 + (2 x $30,000) = $460,000 < $550,000, so a gain is recorded.
$550,000 - $460,000 = $90,000

Question 19

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At the beginning of 2020, a company borrowed $188,610, with payment of $100,000 to be made at the end of each of the years 2020 and 2021. The loan carries an interest rate of 4%. The company makes the $100,000 payment at the end of 2020 but is experiencing financial difficulties and renegotiates the terms of the loan. The creditor grants a concession by changing the payment due at the end of 2021 to $98,076, which changes the effective loan rate to 2%. No gain on restructuring is reported.
-The company reports interest expense in 2020 in the amount of:

Accepted Answer

4% x $188,610 = $7,544

Question 20

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At the beginning of 2020, a company borrowed $188,610, with payment of $100,000 to be made at the end of each of the years 2020 and 2021. The loan carries an interest rate of 4%. The company makes the $100,000 payment at the end of 2020 but is experiencing financial difficulties and renegotiates the terms of the loan. The creditor grants a concession by changing the payment due at the end of 2021 to $98,076, which changes the effective loan rate to 2%. No gain on restructuring is reported.
-The company reports interest expense in 2021 in the amount of:

Accepted Answer

2% x ($188,610 - ($100,000 - $7,544)) = $1,923

Quiz 15: Bankruptcy and Reorganization

In a Chapter 11 reorganization, reorganization value is:

In emerging from reorganization under Chapter 11 of the bankruptcy laws, a company issues new voting shares to creditors and prior shareholders. To qualify for fresh start reporting:

In a troubled debt restructuring, assets with a book value of $200,000 and a fair value of $180,000 are transferred in full settlement of a $250,000 debt. How is this reported?

A company owes the bank $1,020,000. Since the company cannot pay this debt, the bank agrees to allow the company to pay $950,000 in two years, plus interest annually at $48,000 per year. What is the gain on restructuring?

A company owes the bank $550,000. Since the company cannot pay this debt, the bank agrees to allow the company to pay $400,000 in two years, plus interest of $30,000 per year. What is the gain on restructuring?