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1. What is defined as a condition in which a company is unable to meet debts as the debts
mature?
A. Deficit
B. Liability
C. Insolvency
D. Credit squeeze
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Chapter 20 - Corporations in Financial Difficulty
4. Under which nonjudicial action do creditors agree to assist the debtor in managing the most
efficient payment of creditors' claims?
A. Debt restructuring arrangement
B. Creditors' committee management
C. Transfer of assets
D. Composition agreement
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Chapter 20 - Corporations in Financial Difficulty
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Chapter 20 - Corporations in Financial Difficulty
9. A debtor may file which type of petition when seeking judicial protection under the
Bankruptcy Reform Act?
I. Voluntary
II. Involuntary
A. I only
B. II only
C. Either I or II.
D. Neither I nor II
10. Creditors may file which type of petition when seeking remedy under the Bankruptcy
Code?
I. Voluntary
II. Involuntary
A. I only
B. II only
C. Either I or II
D. Neither I nor II
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Chapter 20 - Corporations in Financial Difficulty
13. Which of the following could be true of the proceedings under Chapter 11 of the
Bankruptcy Code?
A. Always administered by the bankruptcy courts.
B. The debtor's assets are sold and its liabilities extinguished.
C. The company does not operate during this period.
D. The debtor continues as a business after the reorganization.
14. Under Chapter 11 proceedings, what represents the fair value of the entity before
considering liabilities and approximates the amount a willing buyer would pay for the entity's
assets?
A. Reorganization value
B. Fire sale value
C. Fresh start value
D. Excess value
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Chapter 20 - Corporations in Financial Difficulty
16. Which of the following observations regarding the use of fresh start accounting is true?
A. It is always required under Chapter 11 bankruptcy proceedings.
B. Prior shareholders will have control of the emerging company.
C. It results in a new reporting entity.
D. It is used under Chapter 7 bankruptcy proceedings.
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Chapter 20 - Corporations in Financial Difficulty
19. Which of the following observations concerning claims by general unsecured creditors is
NOT true?
A. They are paid only after secured creditors and unsecured creditors with priority are
satisfied to the extent of any legal limits.
B. They often receive less than the full amount of their claim.
C. They are entitled to "preference payments" at the discretion of the debtor's management.
D. The amounts to be paid to them are usually stated as a percentage of the total claim.
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Chapter 20 - Corporations in Financial Difficulty
21. "Preference payments" made by the debtor to one creditor to the detriment of all other
creditors within 90 days before the bankruptcy petition was filed:
A. is reduced from the monies available to the general unsecured creditors.
B. is usually written off.
C. may be recovered and returned to the cash available for all creditors.
D. are not recovered, as management assurances are binding.
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Chapter 20 - Corporations in Financial Difficulty
23. What is the general form of the trustee's opening entry, accepting the assets of the debtor
company?
A. Option A
B. Option B
C. Option C
D. Option D
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Chapter 20 - Corporations in Financial Difficulty
24. Which monthly report shows the results of the trustee's fiduciary actions beginning at the
point the trustee accepts the debtor's assets?
A. Statement of affairs
B. Statement of realization and liquidation
C. Statement of financial position
D. Statement of activities
25. The Statement of Realization and Liquidation contains sections for all the following items
except:
A. assets.
B. supplementary items.
C. liabilities.
D. stockholders equity.
26. In a statement of realization and liquidation, unusual revenue items are reported under:
A. assets.
B. extraordinary items.
C. supplementary items.
D. These are never reported.
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Chapter 20 - Corporations in Financial Difficulty
27. All of the following items are reported in a statement of realization and liquidation
except:
A. Cash
B. Prepaid assets
C. Depreciable assets (net)
D. Receiver's expenses
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Chapter 20 - Corporations in Financial Difficulty
28. Which of the following items are likely to be reported in the supplementary items section
of a statement of realization and liquidation?
A. Creditors' claims settled during the period.
B. Trustee's administration fees.
C. New obligations incurred by the trustee.
D. Assets subsequently acquired by the trustee.
Orville Company recently petitioned for bankruptcy and is now in the process of preparing a
statement of affairs. The carrying values and estimated fair values of the assets of Orville
Company are as follows:
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Chapter 20 - Corporations in Financial Difficulty
29. Based on the preceding information, what is the total amount of unsecured claims?
A. $113,000
B. $126,000
C. $93,000
D. $121,000
AACSB: Analytic
AICPA: Measurement
30. Based on the preceding information, what estimated amount will be available for general
unsecured creditors upon liquidation?
A. $28,000
B. $93,000
C. $113,000
D. $121,000
AACSB: Analytic
AICPA: Measurement
31. Based on the preceding information, what is the estimated dividend percentage?
A. 23 percent
B. 93 percent
C. 77 percent
D. 68 percent
AACSB: Analytic
AICPA: Measurement
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Chapter 20 - Corporations in Financial Difficulty
32. Eagle Company recently petitioned for bankruptcy and is now in the process of preparing
a statement of affairs. The following information has been assembled for this statement:
What amount will be paid to the fully secured creditors and the creditors with priority?
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA: Measurement
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Chapter 20 - Corporations in Financial Difficulty
Essay Questions
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Chapter 20 - Corporations in Financial Difficulty
36. What are the conditions necessary for using fresh start reporting in reorganization?
AACSB: Communication
AICPA: Critical Thinking
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Chapter 20 - Corporations in Financial Difficulty
37. Wilbur Corporation is to be liquidated under Chapter 7 of the Bankruptcy Code. The
balance sheet on December 31, 2008, is as follows:
1. Marketable securities consist of 2,000 shares of Bristol Inc. common stock. The market
value per share of the stock is $8. The stock was pledged against a $20,000, 8 percent note
payable that has accrued interest of $800.
2. Accounts receivable of $40,000 are collateral for a $35,000, 10 percent note payable that
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Chapter 20 - Corporations in Financial Difficulty
Required
a. Prepare a statement of affairs as of December 31, 2008.
b. Compute the estimated percentage settlement to unsecured creditors.
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Chapter 20 - Corporations in Financial Difficulty
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Chapter 20 - Corporations in Financial Difficulty
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Chapter 20 - Corporations in Financial Difficulty
b)
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Chapter 20 - Corporations in Financial Difficulty
AACSB: Analytic
AICPA: Measurement
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Chapter 20 - Corporations in Financial Difficulty
38. A trustee has been appointed for Smith Company, which is being liquidated under Chapter
7 of the Bankruptcy Code. The following transactions occurred after the assets were
transferred to the trustee:
1. Credit sales by the trustee were $100,000. Cost of goods sold were $72,000, consisting of
all the inventory transferred from Smith.
2. The trustee sold all $20,000 worth of marketable securities for $15,000.
3. Receivables collected by the trustee:
Old: $28,000 of the $50,000 transferred
New: $65,000
4. Disbursements by the trustee:
Old current payables: $31,000 of the $65,000 transferred
Trustee's expenses: $6,000
5. Recorded $24,000 depreciation on the plant assets of $120,000 transferred from Smith.
Required:
Prepare a statement of realization and liquidation according to the traditional approach
illustrated in the chapter.
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Chapter 20 - Corporations in Financial Difficulty
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Chapter 20 - Corporations in Financial Difficulty
AACSB: Analytic
AICPA: Measurement
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Chapter 20 - Corporations in Financial Difficulty
39. Briefly explain the three classes of creditors specified in the Bankruptcy Code.
The Bankruptcy Code specifies three classes of creditors whose claims have the following
priorities: (1) secured creditors, (2) creditors with priority, and (3) unsecured creditors.
Secured creditors have liens, or security interests, on specific assets, often called "collateral."
A creditor with such a legal interest in a specific asset has the highest priority claim on that
asset. Creditors with priority are unsecured creditors having no collateral claim against
specific assets, who have priority over other unsecured creditors. Creditors with priority are
the first to be paid from any proceeds available to unsecured creditors. General unsecured
creditors are paid only after secured creditors and unsecured creditors with priority are
satisfied to the extent of any legal limits. Often the general unsecured creditors receive less
than the full amount of their claim.
AACSB: Communication
AICPA: Critical Thinking
40. To obtain cash quickly, DebCo. sold $750,000 of its receivables to Finco., with recourse.
As the accountant for DebCo., what issues do you need to resolve in order to determine the
appropriate accounting treatment?
Selling receivables "with recourse" means that the debtor must accept the return of any
uncollectible receivables that were transferred. FASB 140, "Accounting for Transfers and
Servicing of Financial Assets and extinguishment of Liabilities" specifies that a transfer of
financial assets is considered a sale only if the transferor has surrendered control over the
transferred assets. Selling the receivables with recourse does not remove ultimate control from
the debtor.
AACSB: Communication
AICPA: Critical Thinking
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