Chapter 21—Debt Restructuring, Corporate Reorganizations, and
Liquidations Key
1. Which of the following is an illustration of an action that can be taken to help a troubled firm without using
the court system?
2. Land and buildings having a book value of $150,000 and a fair value of $185,000 are transferred to a creditor
in a troubled debt restructuring to fully settle a loan of $200,000 plus accrued interest of $3,000. What is the
amount of the gain on restructuring?
3. In a troubled debt restructuring where the debtor elects to transfer an equity interest to a creditor in exchange
for the satisfaction of an outstanding debt:
4. On January 1, 20X2, Duke Company negotiated an agreement to modify the terms of a $500,000 note with
$38,000 of accrued interest. Payments of $25,000 cash will be made each quarter end up to and including June
30, 20X6. Which of the following is true about this troubled debt restructuring?
5. On January 1, 20X2, Duke Company negotiated an agreement to modify the terms of a $500,000 note with
$38,000 of accrued interest. Payments of $35,000 including interest will be made each quarter end up to and
including June 30, 20X6. Which of the following is true about this troubled debt restructuring?
6. Equipment with a fair value of $65,000 and a cost basis of $60,000 is transferred to a creditor in partial
settlement of a debt of $150,000 plus accrued interest of $7,500. The balance of the debt will be satisfied by 3
equal payments of $30,000 over the next three years. Which of the following journal entries best records the
restructure?
7. In a troubled debt restructuring involving only the modification of terms of a loan receivable, how should the
loan receivable be measured on the creditor’s balance sheet?
8. In a quasi-reorganization, which of the following may occur?
9. In a quasi-reorganization, a debit balance in Retained Earnings (a deficit) is eliminated by
10. After eliminating the deficit in a reorganization plan, a balance may remain in Reorganization Capital. On
the balance sheet, where would this account appear?
11. Which of the following is not a general objective of bankruptcy procedures?
12. A voluntary bankruptcy petition can be filed under
13. A plan of reorganization may include all except which of the following?
14. Which of the following is not true of a company operating as a “debtor–in–possession’ after a chapter 11
reorganization plan is approved by the bankruptcy court?
15. Which of the following are characteristics of the financial statements of a company emerging from
bankruptcy under fresh-start accounting rules?
16. To assist the trustee in a chapter 7 bankruptcy, a debtor must
17. Which of the following is not a duty of a trustee in a chapter 7 liquidation?
18. Put the following classes in the order allowed by the Bankruptcy Act, starting with the highest priority to the
lowest:
1)
Expenses to administer estate
2)
Tax claims of governmental units
3)
Wages (including salaries and commissions) up to $10,000 earned within 180 days
4)
deposits up to $1,800 each for goods or services never received from the debtor
19. Which of the following statements is true?
20.
The document used to estimate amounts available to each class of claims is called a(n)
21. Which of the following does not describe the accounting statement of affairs?
22. Lakeside Bank holds a $100,000 note secured by a building owned by Fly-By-Night Manufacturing, which
has filed for bankruptcy under Chapter 7 of the Bankruptcy Code. If the property has a book value of $120,000
and a fair market value of $90,000, what is the best way to describe the note held by Second City Bank? The
bank has a(n)
23. In the accounting statement of affairs, the gains or losses upon liquidation would equal
24. A corporation’s accounting statement of affairs shows a dividend of 115%. The dividend means that
25. The ratio called “dividend to general unsecured creditors” is calculated by which of the following formulas?
26. A corporation’s accounting statement of affairs shows a dividend of 40%. The dividend means that
27. The Statement of Realization and Liquidation differs from the Statement of Affairs because
28. The document used by a trustee to report periodically on the status of fiduciary activities is called a(n)
29. Equipment with a book values of $120,000 is sold in a liquidation process for cash of $110,000. This
equipment was security for a $150,000 bank loan. Any remainder is consider unsecured without priority. How
would this transaction be reported on the Statement of Realization and Liquidation?
30. Hogan, Inc. is a telecommunications company. Currently, Hogan is experiencing difficulty in servicing its
long-term debt. The corporation has obtained permission from its creditors to restructure outside of the court
system with the following transactions:
a.
A piece of equipment that had cost Hogan $95,000 and had $19,000 of accumulated depreciation was transferred to a creditor in full
settlement of a $45,000 note with $2,250 of accrued interest.
b.
2,000 shares of $2 par value common stock were issued to a creditor in full payment of a $80,000 loan, plus accrued interest of $800. The
stock was selling for $30 per share on the date of exchange.
c.
A loan with a book value of $50,000 and accrued interest of $1,000 was restructured so that three annual installments of $12,000 will
satisfy both the principal and interest in full.
Required:
Prepare the necessary journal entries to record these transactions in the journal of Hogan.
Loss on Transfer
28,750
Notes Payable
45,000
Accrued Interest Payable
2,250
Accumulated Depreciation
19,000
Equipment
95,000
b.
Loan Payable
80,000
Accrued Interest Payable
800
Common Stock
4,000
Paid-In Capital in Excess of Par
56,000
Gain on Restructuring
20,800
Loan Payable
50,000
Accrued Interest Payable
1,000
Restructured Loan Payable
36,000
Gain on Restructuring
15,000
31. Zenato’s Corporation is a chain of sandwich shops that has recently had difficulty meeting its long-term debt
requirements. In order to avoid court proceedings, the firm’s creditors agreed to the following debt restructuring
in December, 20X1:
a.
A $50,000 note would be fully satisfied with a single $40,000 payment on March 1, 20X2. The note had accrued interest of $2,000 on
December 1, 20X1.
b.
A $75,000 note with accrued interest of $3,000 will be fully satisfied with $35,000 payments on December 1, 20X2 and December 1,
20X3. The original interest rate on the note was 12%.
c.
A $40,000 note with no accrued interest will be satisfied with payments of $23,048 on December 1, 20X2 and December 1, 20X3. The old
note carried a 15% interest rate. The effective rate on the restructured note is 10%.
Required:
Prepare the journal entries to record the restructuring and payments of the notes.
December 1, 20X1
Notes Payable
50,000
Accrued Interest Payable
2,000
Restructured Note Payable
40,000
Gain on Restructuring
12,000
March 1, 20X2
Restructured Note Payable
40,000
Cash
40,000
b.
December 1, 20X1
Accrued Interest Payable
3,000
Restructured Note Payable
70,000
Gain on Restructuring
8,000
December 1, 20X2
Restructured Notes Payable
35,000
Cash
35,000
December 1, 20X3
Restructured Notes Payable
35,000
Cash
35,000
December 1, 20X1
Notes Payable
40,000
Restructured Notes Payable
40,000
December 1, 20X2
Restructured Notes Payable
19,048
Interest Expense ($40,000 ´ 10%)
4,000
Cash
23,048
December 1, 20X3
Restructured Notes Payable
20,953
Interest Expense ($40,000 – 19,048) ´ 10%
2,095
Cash
23,048
32. Following is the balance sheet of Tontoe Corporation on July 1, 20X5, just prior to obtaining the required
stockholder approval to undergo a quasi-reorganization:
Tontoe Corp.
Balance Sheet
July 1, 20X5
Assets
Current Assets:
Cash
$ 5,000
Accounts receivable
110,000
Inventory
105,000
$220,000
Property, plant, and equipment:
Land
$ 50,000
Plant and equipment
$200,000
Less accumulated depreciation
(120,000)
80,000
130,000
Total assets
$350,000
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable
$100,000
Long-term Liabilities:
Notes payable
190,000
Common stock ($10 par)
$50,000
Paid in excess of par
25,000
Retained earnings (deficit)
(15,000)
60,000
Total liabilities and stockholders’ equity.
$350,000
Required:
Prepare the journal entries necessary to record the following items that were part of the quasi-reorganization:
a.
Inventory is to be reduced to its fair market value of $90,000.
b.
The plant and equipment is to be revalued to $70,000 through the Accumulated Depreciation account.
c.
Par value of the stock is reduced to $1 per share and the deficit is eliminated.
a.
Retained Earnings
15,000
Inventory
15,000
b.
Retained Earnings
10,000
Accumulated Depreciation
10,000
c.
Common Stock ($10 par)
50,000
Common Stock ($1 par)
5,000
Reorganization Capital *
45,000
Reorganization Capital *
40,000
Retained Earnings (15,000 + 15,000 + 10,000)
40,000
33. Wayne Corporation, a manufacturer of farm machinery, had poor financial results last year because of a
drought. Back orders indicate complete recovery this year. To eliminate a deficit that increased when the books
were closed at the end of last year, the corporation has received stockholders’ and state approval to conduct a
quasi-reorganization on January 2.
Required:
Prepare journal entries as of January 2 to record the quasi-reorganization and the stockholders’ equity section of
its balance sheet immediately thereafter. The following data are pertinent:
a.
Inventory at year-end is shown at FIFO cost of $280,000. Inventory is to be valued at replacement cost of
$250,000.
b.
Property, plant, and equipment are shown in the records at $4,000,000, net of accumulated depreciation. They
are to be written down to fair value of $3,100,000.
c.
Stockholders’ equity consists of:
Common stock ($10 par) 400,000 shares issued
and outstanding
$4,000,000
Additional paid-in capital
100,000
Retained earnings (deficit).
(2,600,000)
Total stockholders’ equity
$1,500,000
Par value of stock is to be reduced from $10 to $1 per share. Paid-in capital related to the former stock is to
be canceled.
d.
The deficit is to be eliminated.
a.
Retained Earnings
30,000
Inventory
30,000
To reduce inventory from FIFO cost to
market.
b.
Retained Earnings
900,000
Accumulated Depreciation (or Property,
plant, and equipment)
900,000
To reduce fixed assets to fair value.
c.
Common Stock ($10 par)
4,000,000
Additional Paid-in Capital
100,000
Common Stock ($1 par)
400,000
Reorganization Capital
3,700,000
To record issuance of $1 par to
replace $10 par and its additional
paid-in capital
d.
Reorganization Capital
3,530,000
Retained Earnings (2,600,000 + 30,000 + 900,0000
3,530,000
To eliminate the deficit.
34. Below is a list of unsecured items that may arise during a Chapter 7 liquidation.
a.
Wages up to $4,000 earned within 90 days before the filing.
b.
Tax claims of a government unit.
c.
Debts incurred after commencement of involuntary bankruptcy but before the order for relief.
d.
Claims of general creditors not granted priority.
e.
Deposits up to $1,800 each for goods or services never received from the debtor.
f.
Expenses to administer the estate.
g.
Unpaid contributions to employee benefit plans arising from service performed up to 180 days before filing, up to $4,000 per employee
covered.
Required:
Reorder the list of unsecured items by the priority they will receive to meet unsecured claims from amounts available.
1.
f.
Expenses to administer the estate.
2.
c.
Debts incurred after commencement of involuntary bankruptcy but before the order for relief.
3.
a.
Wages up to $4,000 earned 90 days before the filing.
4.
g.
Unpaid contributions to employee benefit plans.
5.
e.
Deposits up to $1,800.
6.
b.
Tax claims of a government unit.
7.
d.
Claims of general creditors not granted priority.
35. Kentucky Blue, Inc., a lawn care service corporation, is in serious financial difficulty with a deficit of
$2,100,000. The company’s plant and equipment were designed for highly specialized products and activities.
Therefore, they would yield only a small fraction of their book value upon sale. Creditors realize that they will
receive little if the corporation is dissolved. In view of the renewed interest in professional lawn care, a plan of
reorganization under Chapter 11 was adopted and received the necessary approvals.
Required:
Prepare journal entries to record the following stipulations of the plan:
a.
Replace the 14% first mortgage bonds with face value of $300,000, on which there is $13,000 of unamortized premium, with 10% interest
bonds, with a face value of $250,000. To cover the accrued interest of $42,000 on the 14% bonds, bondholders will receive 20,000 shares
of new $1 par common stock.
b.
Unsecured accounts and notes payable total $200,000. Creditors have agreed to accept $0.55 on the dollar.
c.
Replace the 10%, $100 par, cumulative participating preferred stock (of which 10,000 shares are outstanding, having a related paid-in
capital in excess of par of $170,000) with an equal number of shares of 8%, $40 par, noncumulative nonparticipating preferred stock. The
corporation will no longer be liable for the $100,000 of undeclared dividends in arrears on the 10% preferred stock.
d.
Replace the 200,000 shares of $10 par common stock, having a discount of $80,000, with an equal number of $1 par common shares.
e.
Eliminate the deficit.
