Answer: The Bankruptcy Reform Act specifies the plan must be voted on by the company’s creditors and
stockholders before being confirmed by the court.
Learning Objective: 13-08
Topic: Reorganization plan
Difficulty: 1 Easy
Blooms: Remember
AACSB: Reflective Thinking
AICPA BB: Legal
AICPA FN: Research
[QUESTION]
57. How is the presentation of an income statement during a reorganization different from a normal
income statement?
58. How is the presentation of a balance sheet during a reorganization different from a normal balance
sheet?
Bonds payable
81,000
Administrative expenses for liquidation
26,000
The company had the following assets:
Book
Fair
Value
Value
Current assets
$
104,000
$
42,900
Land
130,000
117,000
Buildings & equipment
130,000
143,000
[QUESTION]
REFER TO: 13-04
59. Prepare a schedule to show the amount of total assets available to pay liabilities with priority and
unsecured creditors.
60. Prepare a schedule to show the amount of total liabilities with priority.
AICPA: FN Measurement
[QUESTION]
REFER TO: 13-04
61. Prepare a schedule to show the amount of assets available for unsecured creditors after payment of
liabilities with priority.
62. Prepare a schedule to show the amount of total unsecured non-priority liabilities.
63. Prepare a schedule to show the amount of total payment on notes payable. (Round the payout
percentage to one decimal place, for example, .1234 as 12.3 percent.)
Learning Objective: 13-07
Topic: Calculate amount to pay creditors
Difficulty: 2 Medium
Assets (pledged against debts of $91,000)
$ 150,800
Assets (pledged against debts of $169,000)
Other assets
Liabilities with priority
Unsecured creditors
64. Prepare a schedule to show the amount of total assets available to pay liabilities with priority and
unsecured creditors.
Other assets
$ 104,000
Excess from assets pledged with secured creditors
($150,800
$91,000)
priority and unsecured creditors
$ 163,800
Payment of notes payable:
Value of security (land)
$ 117,000
58.2%* of remaining $39,000
22,698
Total
$139,698
*Available after priority $133,850 ÷ unsecured liabilities $230,050 =
58.2%
AICPA: FN Measurement
[QUESTION]
REFER TO: 13-05
65. Prepare a schedule to show the amount of assets that are available for unsecured creditors after
payment of liabilities with priority.
66. Prepare a schedule to show the amount of total unsecured liabilities.
67. Prepare a schedule to show the amount of total payment on partially secured debt.
Page 26
68. Prepare a schedule to show the amount of total assets available to pay liabilities with priority and
unsecured creditors.
Assets:
Cash
$ 65,000
($117,000
$ 78,000
69. Prepare a schedule to show the amount of assets available for unsecured creditors after payment of
liabilities with priority.
Payment of partially secured debt:
Value of pledged assets
$ 65,000
30%* of remaining $104,000
31,200
Total
$ 96,200
* $109,200 ÷ $364,000 = 30%
Answer:
Assets available after payment of liabilities with priority:
Total available to pay priority liabilities with priority and unsecured creditors*
$78,000
Total liabilities with priority
(26,000)
Total available for unsecured creditors after liabilities with priority
$ 52,000
Total available to pay priority liabilities with priority and unsecured creditors*
Cash
$65,000
Excess from inventory pledged with secured creditors ($117,000 – $104,000)
13,000
Total
$78,000
Learning Objective: 13-06
Topic: Statement of Financial Affairs
Difficulty: 2 Medium
Blooms: Apply
AACSB: Knowledge Application
AICPA BB: Legal
AICPA: FN Measurement
[QUESTION]
REFER TO: 13-06
70. Prepare a schedule to show the amount of total unsecured liabilities.
71. Prepare a schedule to show the amount of total payment on the bond.
Learning Objective: 13-06
Topic: Calculate amount to pay creditors
Difficulty: 2 Medium
Blooms: Apply
AACSB: Knowledge Application
AICPA BB: Legal
AICPA: FN Measurement
[QUESTION]
72. A statement of financial affairs created for an insolvent corporation that was beginning the
liquidation process disclosed the following data (assets were shown at net realizable values):
Required:
Prepare a schedule to show the amount available for unsecured creditors after payment of liabilities with
priority.
Payment on bond:
Value of pledged assets
$ 169,000
20%* of remaining $26,000
5,200
Total
$ 174,200
*Available after priority $52,000 ÷ unsecured liabilities $260,000 = 20%
Assets pledged with fully secured creditors
$ 260,000
Fully secured liabilities
195,000
Assets pledged with partially secured creditors
494,000
Partially secured liabilities
637,000
Free assets
390,000
Unsecured liabilities with priority
208,000
Unsecured liabilities
650,000
Use the following to answer questions 73 – 75:
REFERENCE: 13-07
Mount Inc. was a hardware store that operated in Boise, Idaho. Management made some poor inventory
acquisitions that loaded the store with unsalable merchandise. Due to the decline in revenues, the
company became insolvent. Following is a trial balance as of March 15, 2018, the day the company filed
for Chapter 7 liquidation.
Company officials believed that sixty percent of the accounts receivable could be collected if the
company was liquidated. The building and land had a fair value of $97,500, while the equipment was
worth $24,700. The investments represented shares of a publicly traded company that could be sold at the
time for $27,300. The entire inventory could be sold for only $42,900. Administrative expenses
necessary to carry out a liquidation were estimated to be $20,800.
[QUESTION]
REFER TO: 13-07
73. Required:
Prepare a statement of financial affairs for Mount Inc. as of March 15, 2018.
Debit
Credit
Accounts payable
$ 42,900
Accounts receivable
$ 32,500
Accumulated depreciation
—
Building
65,000
Accumulated depreciation
—
Equipment
20,800
Additional paid
–
in capital
10,400
Advertising payable
5,200
Building
104,000
Cash
1,300
Common stock
65,000
Equipment
39,000
Inventory
130,000
Investments
19,500
Land
13,000
Note payable
—
Idaho Savings and Loan (secured by
a lien
on land and building)
91,000
Note payable
—
Second National Bank (secured by
equipment)
195,000
Payroll taxes payable
1,300
Retained earnings (deficit)
163,800
Salaries payable (split equally between two employees)
6,500
Totals
$ 503,100
$ 503,100
Page 30
Values
Assets
Unsecured
Creditors
Pledged with Fully Secured Creditors:
$52,000
Land and building
$97,500
Notes payable
(91,000)
$6,500
Pledged with Partially Secured Creditors:
18,200
Equipment
$24,700
Notes payable
(195,000)
0
Assets Not Pledged:
1,300
Cash
1,300
32,500
Accounts receivable
19,500
130,000
Inventory
42,900
19,500
Investments
27,300
Total available to pay liabilities with priority
and unsecured creditors
97,500
Liabilities with priority (listed below)
(28,600)
Available for unsecured creditors
$ 68,900
________
Estimated deficiency
149,500
$253,500
$218,400
Unsecured
Book
Non-priority
Values
Liabilities and Stockholders’ Equity
Liabilities
Liabilities with Priority:
$ 0
Administrative expenses (estimated)
$20,800
6,500
Salaries payable
6,500
1,300
Payroll taxes payable
1,300
Total
$28,600
Fully Secured Creditors
91,000
Note payable – Idaho Savings & Loan
$91,000
Land and building
(97,500)
$ 0
Partially Secured Creditors:
195,000
Note payable – Second National Bank
$195,000
Equipment
(24,700)
170,300
Unsecured Creditors
42,900
Accounts payable
42,900
5,200
Advertising payable
5,200
(88,400)
Stockholders equity
________
$253,500
$218,400
Learning Objective: 13-06
Topic: Statement of Financial Affairs
Difficulty: 3 Hard
Blooms: Apply
AACSB: Knowledge Application
AICPA BB: Legal
AICPA: FN Measurement
[QUESTION]
Page 31
REFER TO: 13-07
74. Assume that the company was being liquidated and that the following transactions occurred:
▪ Accounts receivable of $23,400 were collected.
▪ All of the company’s inventory was sold for $52,000.
▪ Additional accounts payable of $13,000 incurred for various expenses, for utilities and maintenance
that were subsequently discovered.
▪ The land and building were sold for $92,300.
▪ The note payable due to the Idaho Savings and Loan was paid.
▪ The equipment was sold at auction for only $14,300 with the proceeds applied to the note owed to
the Second National Bank.
▪ The investments were sold for $27,300.
▪ Administrative expenses totaled $26,000 as of July 26, 2018, but no payment had yet been made.
Required:
Prepare a statement of realization and liquidation for the period from March 15 through July 26, 2018 .
Page 32
REFER TO: 13-07
75. How much cash would have been paid to an unsecured non-priority creditor who was owed a total of
$1,300 by Mount Inc.? (Round the payout percentage to a whole number.)
76. Prepare a schedule to show the amount of total assets available to pay liabilities with priority and
unsecured creditors.
77. Prepare a schedule to show the amount of total liabilities with priority.
Page 34
AICPA: FN Measurement
[QUESTION]
REFER TO: 13-08
78. Prepare a schedule to show the amount of assets available for unsecured creditors after payment of
liabilities with priority.
79. Prepare a schedule to show the amount of unsecured liabilities without priority.
Page 35
80. What is the payout percentage to unsecured creditors? (Round the percentage to a whole number and
two decimal places.)
81. How much will be paid to the holder of the note payable secured by the land and building?
(Round your payout percentage to the nearest whole number.)
82. How much will Hampton’s creditor of an unsecured accounts payable of $4,000 receive?
83. Prepare a Statement of Financial Affairs.
Page 37
Topic: Statement of Financial Affairs
Difficulty: 3 Hard
Blooms: Apply
AACSB: Knowledge Application
AICPA BB: Legal
AICPA: FN Measurement
[QUESTION]
84. Berry Company is going through Chapter 11 bankruptcy reorganization. Prepare the income
statement for the calendar year 2018 using the following information. The effective tax rate is 20%.
AICPA BB: Legal
AICPA: FN Measurement
[QUESTION]
85. Candice Company is currently going through bankruptcy reorganization. The accountant has
determined the following balances of the accounts at December 31, 2018.
Assets
Book Value
Fair Value
Cash
$ 30,000
$30,000
Inventory
50,000
51,000
Land
80,000
100,000
Building
70,000
95,000
Equipment
40,000
42,000
Liabilities as of the date of the order of relief
Allowed claims
Expected Settlement
Accounts Payable
$110,000
$70,000
Accrued Expenses
40,000
15,000
Income taxes payable
24,000
19,000
Note payable secured by land due 2020
75,000
75,000
Liabilities since the date of the order of relief
Accounts Payable
$ 65,000
Note Payable due 2019
50,000
Common Stock
$100,000
Prepare the balance sheet for Candice Company. Retained earnings will need to be calculated.
Current assets:
Cash
Inventory
Land, buildings, and equipment:
Land
Buildings
Equipment
Total assets
Liabilities not subject to compromise:
Current liabilities:
Accounts payable
Note payable (due 2019)
Page 39
Long-term liabilities:
Note payable (due 2020)
75,000
$ 190,000
Liabilities subject to compromise
Accounts payable
$110,000
Accrued expenses
40,000
Income taxes payable
24,000
174,000
Total liabilities
$ 364,000
Stockholders’ equity
Common stock
$100,000
Retained earnings (deficit)*calc below
(194,000)
(94,000)
Total liabilities and shareholders’ (deficit)
$ 270,000
*Retained earnings ($270,000 = $364,000+$100,000-X) (X=-$194,000)
Learning Objective: 13-09
Topic: Reorganization reporting―GAAP
Difficulty: 3 Hard
Blooms: Apply
AACSB: Knowledge Application
AICPA BB: Legal
AICPA: FN Measurement