Solution manual for questions, exercises, and problems of Advanced Accounting 12e by Floyd A. Beams, Joseph H. Anthony, Bruce Bettinghaus, and Kenneth A. Smith.
Test Bank - Advanced Accounting 13th Edition by Floyd Beams All Chapters Covered ,Latest Edition, ISBN:9780134472140
Test Bank - Advanced Accounting 13th Edition by Floyd Beams, All Chapters Covered ,Latest Edition, ISBN:9780134472140
Test Bank for Advanced Accounting 13th Edition by Floyd Beams, Joseph Anthony, Bruce Bettinghaus, Kenneth Smith, All Chapters |Complete Guide A+
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Chapter 18
CORPORATE LIQUIDATIONS and REORGANIZATIONS
Answers to Questions
1 Chapter 7 bankruptcy is where the entity is appointed to sell off assets of the entity and pay claim to the
creditors, so basically, a liquidation would be needed. Meanwhile, chapter 11 bankruptcy involves a
rehabilitation to the debtor entity, in which a reorganization would be expected to happen. Based on the
nature of both bankruptcy, chapter 11 is usually initiated first, where the debtor entity would have the
chance to negotiate to settle all claims and continue to operate. If chapter 11 is failed to carried out then
chapter 7 is initiated where the debtor entity would be liquidated and cease to operate.
2 Order of relief is an order from the court to protect the debtor entity from bankruptcy. If the order is
issued then the debtor entity would be protected against any litigation while the court supervise a
reorganization plan where the creditor and debtor entity negotiate the plan for settling all the claims.
3 The duties of the U.S. trustee are to maintain and supervise a panel of private trustees eligible to serve in
Chapter 7 cases, to serve as trustee or interim trustee in some bankruptcy cases, to supervise the
administration of bankruptcy cases, and to preside over creditor meetings. Bankruptcy judges still
supervise cases in districts without U.S. trustees.
4 The debtor corporation in a bankruptcy case has the following duties: (1) to file a list of creditors, a
schedule of assets and liabilities, and a statement of the debtor’s financial affairs; (2) to cooperate with
the trustee so that the trustee may perform his duties; (3) To surrender all property, including books,
documents, records, and so on, to the trustee; and (4) to appear at hearings of the bankruptcy court as
required.
5 A trustee is not appointed in all Title 11 cases. In Chapter 7 cases, a trustee will be elected by unsecured
creditors if a majority of creditors vote for the trustee, and those creditors hold at least 20 percent of the
claims. Otherwise, an appointed interim trustee serves as trustee. In Chapter 11 cases a trustee is
appointed only if deemed necessary by the court, but otherwise, the debtor remains in possession of the
estate and performs the duties of a trustee. Within 30 days from the time the court orders the appointment
of a trustee in a Chapter 11 case, a party in interest may request the election of a trustee.
6 The trustee in a liquidation case takes possession of the debtor’s estate, converts estate assets into cash,
and distributes the proceeds as directed by the court. They also performs other duties such as
investigating the financial affairs of the debtor, providing information about the estate to parties of
interest, examining creditor claims and objecting to those that appear improper, operating the debtor’s
business if authorized to do so by the court, providing financial reports and summaries about the estate to
the court, and filing reports on trusteeship as directed by the court.
7 The priority rankings in a Chapter 7 liquidation case are summarized in Exhibit 18–2 of the text. The
priorities recognized for unsecured claims (Rank II) are: (1) administrative expenses, (2) claims incurred
between an involuntary filing and appointment of a trustee, (3) salary claims up to $11,725 per individual
earned within 180 days of filing, (4) employee benefit plan contribution claims up to $11,725 per
individual earned within 180 days of filing, (5) individual claims up to $2,600 for goods and services
purchased from, but not provided by the debtor, and (6) claims of governmental units for taxes owed by
the debtor (subject to time restrictions), including taxes collected and withheld for which the debtor is
liable.
8 Four ranks within the unsecured nonpriority claim category (general unsecured claims) are: (1) claims
allowed that were timely filed, (2) claims allowed where proof was filed late, (3) claims allowed for
fines, penalties or forfeitures, or damages, and arising before the court order for relief or appointment of a
trustee, and (4) claims for interest on unsecured claims.
9 The accountant’s statement of affairs is a financial statement that is designed to provide information
about liquidation values and priority rankings for use by the trustee, the court, creditors, and other
interested parties in the debtor’s estate. Assets are measured at expected net realizable values in the
statement, but book values are also included for reference purposes.
10 A debtor corporation’s estate may be liquidated even though the filing is under Chapter 11. This can
occur when the case is transferred to Chapter 7 for liquidation. It can also be carried out in accordance
with an approved Chapter 11 plan of reorganization that calls for sale and distribution of the proceeds
from the debtor corporation’s estate.
11 A debtor in possession reorganization case is a Chapter 11 case in which the bankruptcy court does not
appoint a trustee, but instead, allows the debtor corporation to carry out the duties that otherwise would
be performed by a trustee.
12 A creditor committee can file a plan of reorganization under a Chapter 11 case after 120 days from the
date the court order for relief is granted. The order for relief occurs when the debtor or creditor’s filing
petition is approved by the court.
13 The approval of a plan of reorganization requires acceptance of the plan by at least two-thirds in dollar
amount of claim holders and over half in number of claims in each class of claims. Further, each class of
claims must accept the plan or not be impaired under it. A class of claims that would receive nothing if
the corporation were liquidated is not impaired if it receives nothing under a plan and, accordingly,
acceptance by that class of claims is not required.
14 Prepetition liabilities are the liabilities of an enterprise that were incurred prior to a Chapter 11 filing.
They are reported at the amounts allowed by the bankruptcy court. Prepetition liabilities subject to
compromise are those liabilities that may be impaired by a plan and that are eligible for compromise
because they are either unsecured or undersecured.
15 Since the company is still operating under chapter 11, any income, expenses, gains, and losses due to the
reorganization will be accounted for in the income. These income statement items should be reported
separately as a reorganization items except the ones that should be reported as discontinued operations.
Cash flows related to the reorganization are also to be disclosed separately in the cash flow statement
using a direct method as a recommendation.
16 Fresh start reporting should be used by a company emerging from Chapter 11 if the following two
conditions are met: (1) the reorganization value of the assets of the emerging entity immediately before
the date of confirmation of the reorganization plan is less than the total of all postpetition liabilities and
allowed claims and (2) holders of existing voting shares immediately before confirmation of the
reorganization plan receive less than 50 percent of the voting shares of the emerging entity.
17 Entities not qualifying for fresh start reporting report liabilities compromised by a confirmed
reorganization plan in a manner similar to that of a note issued in a noncash transaction under FASB ASC
835. Forgiveness of debt should be reported as an extraordinary item.
Solution E18-1 Solution 18-2
1 b 1 a
2 d 2 d
3 c 3 c
4 d 4 d
Solution E18-3
Total Foley Ltd. Assets available for secured creditors:
Plant assets $25,000
Accounts receivable $15,000
Other current assets $ 5,000 $45,000
Notes payable to bank and creditors ($20,000 + $15,000) ($35,000)
Total available for priority and unsecured creditors $10,000
Less: priority liabilities to employees ($5,000)
Total available for unsecured creditors (i.e. suppliers) $5,000
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