Chapter 13

Question 1

What are the objectives of the bankruptcy laws in the United States?

Answer 1

Distribute assets fairly and discharge honest debtors from their obligations.

Question 2

In a bankruptcy, what does Chapter 7 and Chapter 11 refer to?

Answer 2

A liquidation is referred to as a Chapter 7 bankruptcy, and a reorganization is referred to as a Chapter 11 bankruptcy.

Question 3

The Jackston Company is to be liquidated as a result of bankruptcy. Until the liquidation occurs, on what basis are its assets reported?

Answer 3

Net realizable value.

Question 4

An involuntary bankruptcy petition must be filed by

Answer 4

Unsecured creditors with total debts of at least $15,325.

Question 5

An order for relief does what?

Answer 5

Prohibits creditors from taking action to collect from an insolvent company without court approval.

Question 6

Which of the following is not a liability that has priority in a liquidation?

1. Administrative expenses incurred in the liquidation.
2. Payroll taxes due to the federal government.
3. Advertising expense incurred before the company became insolvent but not recorded until after the order of relief.
4. Salary payable of $800 per person owed to 26 employees.

Answer 6

3. Advertising expense incurred before the company became insolvent but not recorded until after the order of relief.

Question 7

Which of the following is the minimum limitation necessary for filing an involuntary bankruptcy petition in connection with a company that has 57 unsecured creditors?

1. The signature of three creditors to whom the debtor owes at least $15,325 in unsecured debt.
2. The signature of 12 creditors to whom the debtor owes at least $14,775 in unsecured debt.

Answer 7

1. The signature of three creditors to whom the debtor owes at least $15,325 in unsecured debt.

Question 8

On a statement of financial affairs, how are liabilities classified?

Answer 8

Secured and unsecured.

Question 9

What is a debtor in possession?

Answer 9

The ownership of an insolvent company that continues to control the organization during a bankruptcy reorganization.

Question 10

How are anticipated administrative expenses reported on a statement of financial affairs?

Answer 10

As a liability with priority.

Question 11

Prior to filing a voluntary Chapter 7 bankruptcy petition, Haynes Company pays a supplier $13,000 to satisfy an unsecured claim. Haynes was insolvent at the time. Subsequently, the trustee appointed to oversee this liquidation forces the return of this $13,000 from the supplier. Which of the following is correct?

1. The supplier should sue for the return of this money.
2. A preference transfer has been voided.
3. The $13,000 claim becomes a liability with priority.

Answer 11

2. A preference transfer has been voided.

Question 12

Which of the following is not an expected function of a bankruptcy trustee?

1. Liquidating noncash assets.
2. Recovering all property belonging to a company.
3. Filing a plan of reorganization.
4. Distributing assets to the proper claimants.

Answer 12

3. Filing a plan of reorganization.

Question 13

What is an inherent limitation of the statement of financial affairs?

Answer 13

Many of the amounts reported are only estimations that might prove to be inaccurate.

Question 14

What is a cram down?

Answer 14

The bankruptcy court’s confirmation of a reorganization even though a class of creditors or stockholders did not accept it.

Question 15

On a balance sheet prepared for a company during its reorganization, how are liabilities reported?

As equity related and debt related.

As subject to compromise and not subject to compromise.

As current and long term.

As monetary and nonmonetary.

Answer 15

As subject to compromise and not subject to compromise.

Question 16

When does the liquidation basis of accounting first have to be applied to financial statements of a liquidating entity to be viewed as in conformity with U.S. GAAP?

Answer 16

When liquidation is imminent.

Question 17

What financial statements must be reported when the liquidation basis of accounting is being applied?

Answer 17

Statement of changes in net assets in liquidation and statement of net assets in liquidation.

Question 18

How are assets to be reported when the liquidation basis of accounting is applied?

At the lower of cost or market value.

At the estimated amount of cash to be received.

At cost less accumulated depreciation.

At fair value.

Answer 18

At the estimated amount of cash to be received.

Question 19

The England Company has a debt to a bank of $55,000. The company is currently being liquidated and believes that between $12,000 and $20,000 will be paid on that debt. According to the liquidation basis of accounting, what amount is reported for this liability?

Answer 19

$55,000.

Question 20

On a balance sheet prepared for a company during its reorganization, at what balance are liabilities reported?

Answer 20

At the expected amount of the allowed claims.

Question 21

Which of the following is not a reorganization item for purposes of reporting a company’s income statement during a Chapter 11 bankruptcy?

Gains and losses on closing facilities.

Interest revenue.

Interest expense.

Professional fees.

Answer 21

Interest expense.

Question 22

What are free assets?

1. assets for which replacement cost is greater than historical cost.
2. assets available to be distributed for liabilities with priority and for other unsecured obligations.
3. assets available to be distributed to stockholders.

Answer 22

2. assets available to be distributed for liabilities with priority and for other unsecured obligations.

Question 23

How should the fresh start reorganization value normally be determined?

as the sum of current replacement cost of the company’s assets.

by discounting future cash flows for the entity that will emerge.

as the sum of the historical cost of net assets.

Answer 23

by discounting future cash flows for the entity that will emerge.

Question 24

How are assets and liabilities valued on a Statement of Financial Affairs?

A. Assets = Fair Value Liabilities = Book Value

B. Assets = Net Realizable Value Liabilities = Amount Required for Settlement

Answer 24

B. Assets: Net realizable value

Liabilities: Amount required for settlement

Question 25

Which of the following is not a responsibility of the bankruptcy trustee?

Recover all property belonging to the insolvent company.

Liquidate common stock of the company.

Preserve the estate from any further deterioration.

Make distributions to the proper claimants.

Answer 25

Liquidate common stock of the company.

Question 26

In a statement of financial affairs, assets are classified

according to whether they are pledged with particular creditors.

as current or noncurrent.

as monetary or nonmonetary.

Answer 26

according to whether they are pledged with particular creditors.

Question 27

Which one of the following is a requirement that must be met before an involuntary bankruptcy petition can be filed when there are at least 12 unsecured creditors?

The petition must be filed by all creditor(s) to whom the debtor owes at least $15,325.

The petition must be signed by at least three creditors with unsecured debts of at least $15,325.

Answer 27

The petition must be signed by at least three creditors with unsecured debts of at least $15,325.

Question 28

On a statement of financial affairs, a company’s assets should be valued at

historical cost.

net realizable value, if lower than historical cost.

replacement cost.

net realizable value, if higher than historical cost.

net realizable value, whether higher or lower than historical cost.

Answer 28

net realizable value, whether higher or lower than historical cost.

Question 29

Which statement is false regarding a plan for reorganization?

The plan is the heart of every Chapter 7 bankruptcy.

The plan shapes the financial structure of the entity that emerges.

The plan may contain numerous provisions as solutions to financial difficulties.

The plan may contain provisions for changes in the management of the company.

Answer 29

The plan is the heart of every Chapter 7 bankruptcy.

Question 30

Lawyer’s fees incurred during a reorganization are accounted for as:

expense.

additional paid-in capital.

retained earnings.

a prepaid asset until the entity emerges from reorganization.

Answer 30

an expense.

Question 31

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

plans for plant expansion.

plans for generating additional monetary resources.

plans to settle the debts of the company that existed when the order for relief was entered.

Answer 31

plans for plant expansion.

Question 32

Sparkman Co. filed a bankruptcy petition and liquidated its noncash assets. Sparkman was paying forty cents on the dollar for unsecured claims. Bailey Co. held a mortgage of $150,000 on land that was sold for $110,000. The total amount of payment that Bailey should have received is calculated to be

Answer 32

$126,000.

Sale of land $110,000 + 40% of remaining $40,000 owed = $126,000

Question 33

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

on the income statement, but not classified as a reorganization item.

on the income statement as a separate reorganization item.

on the balance sheet as a prepaid expense.

Answer 33

on the income statement, but not classified as a reorganization item.