Exam 13: Accounting for Legal Reorganizations and Liquidations

Prepare a Statement of Financial Affairs.

During a reorganization, how should interest expense be reported on the financial statements?

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, 2011, the day the company filed for a 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 would have approximated $20,800. -How much cash would have been paid to an unsecured nonpriority creditor who was owed a total of $1,300 by Mount Inc.? (Round the payout percentage to a whole number)

A company that was to be liquidated had the following liabilities: Income Taxes \ 10,000 Notes Payable secured by land 100,000 Accounts Payable 50,000 Salaries Payable (\ 12,000 from Employee \#1 and \ 2,000 for Employee \#2) 14,000 Administrative expenses for liquidation 20,000 The company had the following assets: Book Value Fair Value Current Assets \ 100,000 95,000 Land 50,000 75,000 Building 150,000 200,000 -Total liabilities with priority are calculated to be what amount?

Bazley Co. had severe financial difficulties and was considering the possibility of filing a bankruptcy petition. At that time, the company had the following assets (stated at net realizable value) and liabilities. Assets (pledged against debts of \ 91,000) \ 150,800 Assets (pledged against debts of \ 169,000) 65,000 Other assets 104,000 Liabilities with priority 54,600 Unsecured creditors 260,000 -Total unsecured liabilities are calculated to be what amount?

What are duties of the creditors committee in Chapter 7 liquidation?

Bazley Co. had severe financial difficulties and was considering the possibility of filing a bankruptcy petition. At that time, the company had the following assets (stated at net realizable value) and liabilities. Assets (pledged against debts of \ 91,000) \ 150,800 Assets (pledged against debts of \ 169,000) 65,000 Other assets 104,000 Liabilities with priority 54,600 Unsecured creditors 260,000 -Total payment on partially secured debt is calculated to be what amount?

During a reorganization, cash reserves tend to grow. How should interest earned on these reserves be reported on the financial statements?

What is the difference between a liquidation and a reorganization?

Hampton Company is trying to decide whether to seek liquidation or reorganization. Hampton has provided the following balance sheet: Additional information is as follows: - The investments are currently worth $13,000. - It is estimated that $32,000 of the accounts receivable are collectible. - The inventory can be sold for $74,000. - The prepaid expenses and the intangible assets have no net realizable value. - The land and building are currently valued at $250,000. - The equipment can be sold for $60,000. - Administrative expenses (not yet recorded) are estimated to be $12,500. - Accrued expenses include $17,000 of salaries payable ($11,000 to one employee and $3,000 each to two other employees). - Accrued expenses include $7,000 of unpaid payroll taxes. -Compute the amount of unsecured liabilities without priority.

How should the fresh start reorganization value normally be determined?

A Chapter 7 bankruptcy is a(n)

Hampton Company is trying to decide whether to seek liquidation or reorganization. Hampton has provided the following balance sheet: Additional information is as follows: - The investments are currently worth $13,000. - It is estimated that $32,000 of the accounts receivable are collectible. - The inventory can be sold for $74,000. - The prepaid expenses and the intangible assets have no net realizable value. - The land and building are currently valued at $250,000. - The equipment can be sold for $60,000. - Administrative expenses (not yet recorded) are estimated to be $12,500. - Accrued expenses include $17,000 of salaries payable ($11,000 to one employee and $3,000 each to two other employees). - Accrued expenses include $7,000 of unpaid payroll taxes. -Compute the amount of assets available for unsecured creditors after payment of liabilities with priority.

Which of the following is not one of the more common reorganization plan elements?

Candice Company is currently going through bankruptcy reorganization. The accountant has determined the following balances of the accounts at December 31, 2011. 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 2013 75,000 75,000 Liabilities since the date of the order of relief Accounts Payable \ 65,000 Note Payable due 2012 50,000 Common Stock \ 100,000 Prepare the balance sheet for Candice Company. Retained earnings will need to be calculated.

A company that was to be liquidated had the following liabilities: Income taxes \ 10,400 Notes payable (secured by land) 156,000 Accounts payable \ 107,900 Salaries payable to employees ( \ 15,000 for John Jay and \ 2,800 for Ann Still) 17,800 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 -Total unsecured nonpriority liabilities are calculated to be what amount?

A company that was to be liquidated had the following liabilities: Income taxes \ 10,400 Notes payable (secured by land) 156,000 Accounts payable \ 107,900 Salaries payable to employees ( \ 15,000 for John Jay and \ 2,800 for Ann Still) 17,800 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 -Required: Assets available for unsecured creditors after payment of liabilities with priority are calculated to be what amount?

How is the presentation of a balance sheet during a reorganization different from a normal balance sheet?

What is meant by a "partially secured liability"?

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, 2011, the day the company filed for a 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 would have approximated $20,800. -Required: Prepare a statement of financial affairs for Mount Inc. as of March 15, 2011.