27.(5 Minutes) (Distribution of assets as a result of liquidation)
Liabilities with Priority
Paid first—administrative expense………………………..…. $3,450
Paid second—wages: total of $6,225 for Rankin but only
up to a maximum of $12,475 for Key……………………. 18,700
No payments will be made by Xavier in connection with the remainder of (a)
28.(8 Minutes) (Distribution of assets to partially secured creditors)
Free Assets:
Other Assets ..…………………..………..……….….….…..…. $ 80,000
Excess from Assets Pledged with Fully Secured
Creditors ($116,000 – $70,000) ….….….….…..….... 46,000
Total ………..………..……………………….….….….…..… $126,000
Percentage of Unsecured Liabilities to Be Paid: $84,000/$280,000 = 30%
Payment on Partially Secured Debt:
Value of Pledged Asset ……………………..………….….… $ 50,000
30% of Remaining $80,000 ………………….….….…..….. 24,000
Total to be Collected by Holders of This Debt.... $ 74,000
29. (8 Minutes) (Distribution of assets to partially secured creditors)
Free Assets:
Cash …………………………..………..……………………….….. $60,000
Excess from Assets Pledged with Fully Secured
Creditors ($110,000 – $90,000)……..….….….….….. 20,000
Total……………..…………………..………..…………….…... $80,000
Percentage of Unsecured Liabilities to be Paid: $57,200/$220,000 = 26%
Payment on Bond:
Value of Pledged Asset…………………..…………………... $140,000
30.(12 Minutes) (Liquidation of assets to satisfy debt)
The holder of Debt 2 will receive $100,000 from the sale of the pledged asset.
This creditor wants to receive $142,000 out of the total debt of $170,000. Thus,
percent of the unsecured liabilities.
Unsecured Liabilities:
Unsecured Creditors …………..………..……….….….…..….… $230,000
Excess Liability of Debt 1 in Excess of Pledged Asset
($210,000 – $180,000) ………..………………………….….… 30,000
Excess Liability of Debt 2 in Excess of Pledged Asset
($170,000 – $100,000) ………..………………………….….… 70,000
In order for the holder of Debt 2 to receive exactly $142,000, the other free
assets must be sold for $308,000. With that much money, the liabilities with
31. (8 Minutes) (Payments to be made on unsecured and partially secured
liabilities)
a. The unpledged assets of $310,000 must be added to any excess to be received
from assets pledged on fully secured debts ($220,000 – $160,000 = $60,000) to
get amount of free assets available of $370,000.
Amount Available ………………..………..………..…………….... $370,000
Liabilities with Priority …………….……….….….…..….….….. (182 ,800)
Available for Unsecured Creditors ………….…..….….. $187 ,200
An unsecured creditor to whom $13,000 is owed can expect to receive $4,680
($13,000 x 36%).
b. The bank will receive a total of $100,800. The secured interest will generate
$90,000 (for the $120,000 note). The remaining $30,000 liability is unsecured so
that only an additional payment of $10,800 (36%) can be expected.
32.(20 Minutes) (Distribution of cash assets resulting from liquidation)
Free Assets: (fair value)
Cash ……..………..………..…………………..………………….. $ 10,000
Inventory……………………………..……….….….…..….….…. 60,000
Equipment……….………..………..……………………..…..….. 50,000
Free Assets after Payment of Liabilities with Priority
($120,000 – $50,000) ……….………..………………….….…. $ 70,000
Unsecured Liabilities
Note Payable A (in excess of value of security) …... $ 20,000
Total ………..………..……………………….….….….…..… $280,000
Percentage of Unsecured Liabilities to Be Paid: $70,000/$280,000 = 25%
Payment on Note Payable A:
Payment on Note Payable B:
Value of Security (building) ………………..….….….….…..… $ 40,000
25% of Remaining $80,000 ……………………………..…….…. 20,000
Total Collected ……….………..………..……………..….….… $ 60,000
Payment on Note Payable C (unsecured):
As a liability with priority, the entire amount due is paid. $ 30,000
33. (15 Minutes) (Liquidation of assets to satisfy debt)
Note payable B is unsecured. The holders want at least $129,000 of the total
Unsecured Liabilities:
Accounts payable……………………..………..………………. $188,000
Note payable A—unsecured portion (186,000-168,000) 18,000
Note payable B ………….……………..….….….….…..….…. 258,000
Total ……….…………………..………….….….….…..….… $464,000
Free Assets (except for equipment):
Less: Liabilities with Priority:
Estimated administrative expenses………….…..….…. (20,000)
In order for unsecured creditors to receive 50 percent of their claims, $232,000
in free assets must be available (50 percent of the $464,000 in total unsecured
34.(15 Minutes) (Payment of various liabilities as a result of liquidation)
Free Assets:
Cash …………………………..…………..….…..….….….… $30,000
Receivables (30 percent collectible)…….….….…....... 15,000
Inventory……………………………..……….….….…..….….…. 39,000
Land (value in excess of secured note:
$120,000 – $110,000)…………………..……………….…. 10,000
Total ……….…………………..………….….….….…..….… $94,000
Percentage of unsecured liabilities to be paid: $84,000/$210,000 = 40%
Amounts to be paid for:
Salary payable (liability with priority to be paid
in full)……….………..………..…………..….…..….….….… $10,000
Accounts payable (unsecured—will collect 40%
35. (2 Minutes) (Reporting of debts during liquidation)
Because of the uncertainty about the amount that will be paid on an
36. (9 Minutes) (Adjusting a company’s records to fresh start accounting as it
comes out of bankruptcy)
The individual assets of Larisa Company have a total fair value of $700,000 but
Because common stock was transferred directly from the previous owners to
the creditors, no entry is needed for the stock account. Because the
$130,000 ($460,000 less $330,000).
Receivables ($90,000 – $80,000) ………………..…..….….…. 10,000
Inventory ($210,000 – $200,000)…………….……………….…. 10,000
37. (15 Minutes) (Prepare income statement for company going through a
bankruptcy reorganization)
ADDISON CORPORATION
Income Statement
Revenues ……….…………………..………..………………..….….. $ 467,000
Costs and expenses:
Cost of goods sold ……………..………..………………….… $ 211,000
Rent expense ………..………..……………………..…..….….. 16,000
Salaries………..………..…………………..………..………..…... 70,000
Reorganization items:
Loss on closing of branch ……..…..….….….….…..….. (109,000)
Professional fees …………..………..………..………………. (71,000)
Interest revenue ……………………………..………..………... 32 ,000 (148 ,000)
38.(15 Minutes) (Description of balance sheet for a company emerging from
bankruptcy reorganization)
a. FASB ASC Topic 852 (Reorganizations) states that a company that is exiting
bankruptcy is considered a new entity (so that fair values would be applicable
for reporting purposes) if two criteria are met. Otherwise, the company is
simply considered to be a continuation of the old concern, a company that
should keep reporting its historical cost figures.
Whenever both of these criteria are met, the company’s assets should be
reported at their current fair values.
b. Under fresh start accounting, the assets are adjusted to current value on the
date that the company successfully emerges from bankruptcy reorganization.
c. The reorganization value in excess of the value of the identified assets and
liabilities is reported as the intangible asset goodwill. Goodwill is reviewed
each year for impairment.
39.(15 Minutes) (Prepare a balance sheet for a company in bankruptcy
reorganization)
JAEZ CORPORATION
Balance Sheet
December 31, 2015
Current assets:
Cash ……..………..………..…………………..………………….. $ 23,000
Inventory ………..…………………..……….….….…..….….…. 45,000 $ 68,000
Land, buildings, and equipment:
Long-term liabilities:
Note payable (due 2017) ……..…..…. $110,000
Note payable (due 2018) ……..…..…. 100,000 210,000 $ 270,000
Liabilities subject to compromise
Accounts payable …………..………..………..………………. 123,000
Accrued expenses ………..………..………..………………… 30,000
Income taxes payable …………………..…….…..….….….. 22,000