Exam 18: Corporate Liquidations and Reorganizations

What is an advantage of filing a Chapter 11 petition?

Which condition must be met for fresh-start reporting for an emerging company from Chapter 11?

Trustin Corporation is in a Chapter 7 bankruptcy liquidation.For each of the following transactions,show the journal entry that would be required by the trustee of the estate. 1.An electric bill is received for $1,000 which had not yet been recorded by Trustin. 2.Inventory recorded net at $18,000 is sold for $16,000 cash. 3.Recorded patents in the amount of $7,000 are determined to be worthless and are written off. 4.Equipment recorded net at $24,000 is sold for $20,000 cash. 5.A building recorded net at $78,000 is sold for $87,000 cash. 6.Trustee fees of $2,500 are accrued. 7.The fully secured mortgage is paid in the amount of $70,000. 8.Wages payable that were recorded in the amount of $9,000 are paid. 9.An equipment lease,which was recorded as prepaid equipment lease,is cancelled and a $1,500 refund is received. 10.Accounts receivable amounting to $12,000 are collected,and an additional $3,000 is determined to be uncollectible.

DeFunk Corporation is being liquidated under Chapter 7 of the Bankruptcy Act.The trustee has determined that the unsecured claims will receive $.18 on the dollar.Magma Corporation holds a $200,000 mortgage receivable from DeFunk that is secured by the land and buildings with a book value of $180,000 and a fair value of $190,000.Magma also holds an $80,000 unsecured note receivable from Defunk.Mortgage interest owed,which is secured with the mortgage note,is $4,000.Note interest owed,which is unsecured,is $2,000. Required: How much of the amounts owed will Magma recover?

Alitech Corporation is liquidating under Chapter 7 of the Bankruptcy Act.The accounts of Alitech at the time of filing are summarized as follows: The land and building are pledged as security for the mortgage payable as well as any accrued interest on the mortgage.Wages and salaries were earned within 90 days of filing the petition for bankruptcy and do not exceed $10,000 per employee.Liquidation expenses are expected to be $30,000. Required: 1.Prepare a schedule showing the priority rankings of the creditors and the expected payouts. 2.Billing Corporation was a supplier to Alitech Corporation and at the time of Alitech's bankruptcy filing,Billing's account receivable from Alitech was $40,000.On the basis of the estimates,how much can Billing expect to receive?

Moddle Corporation is being liquidated under Chapter 7 of the Bankruptcy Act.The trustee has determined that the unsecured claims will receive $.20 on the dollar.National Corporation holds a $500,000 mortgage note receivable from Moddle that is secured by equipment with a $550,000 book value and a $430,000 fair value. Required: How much of the mortgage receivable will National recover?

Hilfmir Corporation filed for Chapter 11 bankruptcy on January 1,2014.A summary of their financial status is shown below on June 30,2014,at the date of the approved reorganization,along with the fair value of their assets. Under the reorganization plan,the reorganization value has been set at $320,000.Prepetition liabilities include $30,000 of trade Accounts Payable and a $220,000 Note Payable to Bigg Bank.The reorganization plan calls for the Prepetition accounts payable to be paid at 80% at a later date,and the Note Payable for $220,000 to be replaced by a Note Payable for $76,000 and the issuance of common stock of the new entity for $100,000.The former stockholders will receive $40,000 in common stock of the new entity,Hilfmir,in exchange for their shares. Required: Show the calculations to determine if Hilfmir is eligible for fresh-start accounting,and prepare a fresh-start balance sheet for the new entity,Hilfmir,as of July 1,2014.

Aqua Corporation filed a petition under Chapter 7 of the bankruptcy act in January,2014.On February 28,the following information was presented regarding Aqua's financial status. The Note Payable is secured by Accounts Receivable,and the Mortgage Payable is secured by the Fixed Assets. Required: Calculate the amount expected to be available for unsecured claims and the percentage recovery that the unsecured class should expect to receive.

Rank the following claims of an organization filing Chapter 7 bankruptcy from 1 to 4 based on the following classifications.Each classification may be used more than once. 1.Secured Claims 2.Unsecured Priority Claims 3.Unsecured Nonpriority Claims 4.Stockholders' Claims ________ A.Claims for wages that are less than $10,000 per individual,earned within 90 days of filing petition for bankruptcy. ________ B.Legal fees incurred after petitioning the court for Chapter 7. ________ C.Claim by the accounting firm for the audit fee from the prior year-end audit completed two months prior to the bankruptcy filing. ________ D.Claims for employee benefit plan contributions that are less than $10,000 per individual and relating to services rendered within 180 days of bankruptcy filing. ________ E.Claims with a valid lien against assets of the entity. ________ F.Claim by employee for commissions earned in 90 days prior to filing bankruptcy petition,for the portion in excess of $10,000. ________ G.Administrative expenses of the estate,such as trustee fees. ________ H.Claim by a supplier for goods delivered on account. ________ I.Interest on unsecured claims. ________ J.Taxes owed to a government unit.

When a corporation's total liabilities are greater than the fair value of total assets,the firm is

Which of the following statements is correct concerning companies emerging from reorganization under Chapter 11 when they do not qualify for fresh start accounting? The forgiveness of debt is reported as

An entity which qualified for fresh-start accounting is not required to disclose which of the following items in their initial financial statements?

Faled Company has the following assets and liabilities,stated at fair value in liquidation. Required: Determine the amount of cash that will be available to pay unsecured creditors,and the percentage of unsecured liabilities that will be paid.

In a Chapter 7 bankruptcy case,what is the first-to-last ranking order of priority for payment? (Use the following list of claim types . ) I.stockholder claims II.unsecured priority claims III.secured claims IV.unsecured nonpriority claims

Which of the following does not occur for a trustee in a Chapter 7 bankruptcy case?

Ohio Corporation is being liquidated under Chapter 7 of the Bankruptcy Act.The trustee has determined that the unsecured claims will receive $.05 on the dollar.Lender Bank holds a $100,000 mortgage note receivable from Ohio that is secured by equipment with a $120,000 book value and a $90,000 fair value,and a second mortgage on the same equipment amounting to $50,000. Required: How much of the mortgage receivable will be recovered by Lender?

Creditor committees are elected

Chapter 7 bankruptcy cases differ from Chapter 11 bankruptcy cases because Chapter 7 bankruptcy

A company emerging from bankruptcy will have a reorganization value that

Dip Corporation is in a Chapter 11 bankruptcy reorganization.For each of the following transactions relating to the reorganization,show the journal entry that would be required by Dip.Assume that all unsecured liabilities were not reclassified to Prepetition Claims Subject to Compromise. 1.Dip has $200,000 in bonds payable which mature at the end of the current year.The bondholders agree to accept $100,000 of new common stock and $75,000 cash,payable immediately. 2.Accrued interest on the bonds recorded at $20,000 will not be paid. 3.Recorded patents in the amount of $15,000 are determined to be worthless and are written off. 4.Equipment recorded net at $24,000 is appraised at $30,000. 5.A building recorded net at $78,000 is appraised for $87,000. 6.Creditors owed $120,000 recorded in accounts payable are paid $96,000 in full settlement. 7.Property taxes and payroll taxes withheld are paid in full at $12,000. 8.A capital lease recorded at $48,000 is re-negotiated,and the resulting operating lease will require monthly lease payments of $500. 9.An unsecured bank note amounting to $180,000 will be exchanged for $120,000 note secured by the building and equipment. 10.Current stockholders will exchange their stock which has a current book value of $300,000 for $100,000 common stock of the new entity.