jeter aa 4e solutionsmanual ch10

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CHAPTER 10 ANSWERS TO QUESTIONS

1. Extension of payment periods. The debtor continues to manage the business, and the creditors merely extend the payment due date(s) for existing debts.

Composition agreements. A composition agreement is an agreement between the debtor company

and its creditors under which the creditors agree to accept less than the full amount of their claims.

Formation of a creditors committee. The debtor company and its creditors agree to form a committee of creditors responsible for managing the debtors business affairs for the period during which plans are developed to rehabilitate, reorganize, or liquidate the business.

Voluntary assignment of assets. An insolvent debtor elects to voluntarily place his property under

the control of a trustee for the benefit of his creditors.

2. In a voluntary petition, the debtor files a petition with a bankruptcy court for liquidation under Chapter 7 or for reorganization under Chapter 11. The bankruptcy judge may refuse a voluntary

petition if refusal is considered to be in the best interest of the creditors.

In an involuntary petition, creditors initiate the action by filing a petition for liquidation or

reorganization with the bankruptcy court. If there are twelve or more creditors, the petition must be

signed by three or more of such creditors whose claims aggregate at least $5,000 more than the

value of any liens on the property of the debtor. If there are fewer than twelve creditors, the

petition may be filed by one or more of such creditors whose claims aggregate at least $5,000 more

than the value of any liens on the debtors property.

3. Fully secured claims. Those claims with liens against specific assets whose realizable value is equal to or in excess of the claim.

Partially secured claims. Those claims with liens against specific assets whose realizable value is

less than the amount of the claim.

Unsecured claims. Those claims that are not secured by liens against specific assets and are,

therefore, paid from whatever total money remains after secured creditors are satisfied. Some

unsecured claims take priority over others under federal bankruptcy law.

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4. The five categories of unsecured claims with priority are:

a. Administrative expenses, fees, and charges incurred in administering the bankrupts estate. b. Unsecured claims for wages, salaries, or commissions earned by an employee within 90 days

before the date of filing a petition in bankruptcy, limited to the extent of $4,650 per employee.

c. Claims for contributions to employee benefit plans from services rendered within 180 days before the date of filing a petition in bankruptcy, but subject to certain limitations.

d. Unsecured claims of individuals, to the extent of $2,100 for each such individual, arising from the deposit of money in connection with the purchase, lease, or rental of property or services

that were not delivered or performed.

e. Claims of governmental units for unpaid taxes.

5. Dividends represent the final distribution made to general unsecured creditors.

6. a. Transfer of Assets: The transfer of assets by a debtor to a creditor generally produces two types of gain or loss. A

gain on restructuring of debt is recognized for the excess of the carrying value of the payable

over the fair value of the assets transferred. This gain is reported as a component of operating

income. In addition, a gain or loss on transfer of assets is recognized for the difference between

the fair value and book value of the assets transferred. This gain (loss) is reported as a

component of operating income also.

b. Grant of an Equity Interest:

A debtor who grants an equity interest to a creditor will report a gain for the difference between

the fair value of the equity interest issued and the carrying amount of the payable settled.

c. Modification of Terms:

In a modification of terms, the debtor will report a gain on restructuring only if the total future

cash payments specified by the new terms are less than the carrying value of the payable. The

amount of gain is measure as the difference between the total future cash payments specified by

the new terms and the carrying value of the payable.

7. The statement of affairs is an accounting report that is designed to permit interested parties to determine the total expected amounts that could be realized from the disposition of a companys assets, the priorities in the use of the realization proceeds in satisfying claims, and the potential net

deficiency that would result if the assets were realized and claims liquidated.

8. The officer is incorrect. Some claims, such as for taxes, fines, and penalties are not discharged.


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9. The primary duties of a trustee are: a. To be accountable of all property received. b. To examine proofs of claims and object to the allowance of any claim that is improper. c. To furnish such information concerning the estate and the estates administration as is requested

by a party in interest.

d. If the business of the debtor is authorized to be operated, file with the court and with any governmental unit charged with responsibility for collection of any tax arising out of such

operation, periodic reports and summaries of the operation of the business.

e. If the debtor has not done so, file with the court a list of creditors, a schedule of assets and liabilities, and a statement of the debtors financial affairs.

f. If applicable, file a plan of reorganization, and, if the plan is accepted, file such reports as are required by the court.

10. The purpose of a combining workpaper is to serve as a means by which the trustees accounts are united with the debtor companys accounts in order to prepare appropriate financial statements.

11. The purpose of a realization and liquidation account is to report summary realization and distribution activities of a trustee or receiver to the court. It reports the changes that have occurred

during a period in the monetary items because that is what the court officials are primarily

interested in.

BUSINESS ETHICS SOLUTIONS

1. In chapter 7 bankruptcy liquidation, firms are assumed to be past the stage of reorganization and must sell off any un-exempt assets to pay creditors. In contrast, Chapter 11 bankruptcy allows

the firm the opportunity to reorganize its debt and to try to re-emerge as a healthy organization.

In both cases, the creditors and other claim-holders suffer losses as they will be most likely

getting less return on investment than expected at the time of the initial decision to invest in the

company. From an ethical perspective, a chapter 11 bankruptcy provides the creditors and other

claim-holders a better chance of recovering higher value for their investments than under

chapter 7 as the firm strives to recover and reorganize under chapter 11 but not under chapter 7.

2. The new law makes sweeping changes to American bankruptcy laws and makes it more

difficult for individuals to file bankruptcy under chapter 7. The new law requires a means test to

determine whether the borrowers have enough resources to pay for their debts. For additional

information, see the following link:

http://en.wikipedia.org/wiki/Bankruptcy_Abuse_Prevention_and_Consumer_Protection_Act]

In addition the new law laid down the following requirements

Mandatory credit counseling and debtor education

Additional filing requirements and fees

Increased attorney liability and costs

Fewer automatic protections for filers

Increased compliance requirements for small businesses

Increased amount of debt repayment under Chapter 13

Increased length of time between discharges


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These changes provide more safety for the creditors, who should consequently be better

protected. Individuals who fail the means test may opt instead for Chapter 13, which involves a

repayment of their debt over time.

3. Applying this test to businesses would benefit the creditors and other claim-holders, as they

would feel a slight buffer to their risk, which might stimulate new business as a result of easier

fund raising. It may also prevent businesses from venturing into unduly risky areas as they

would not be able to bail out as easily by filing under chapter 7 if things went wrong (hence

becoming somewhat more risk averse). It would seem to shift the risk balance somewhat to the

shoulders of the entrepreneur from those of the investor.

4. Filing for bankruptcy is never a desirable or ethical option, but sometimes circumstances may

arise that seem to force a business or an individual into this tough situation. Whether the

individual finds another way at such a time or not is a personal issue and an ethical dilemma,

and there is not necessarily a correct answer to this question. The purpose of this discussion is

to get the student to thinking about his or her personal position, and where his ethical stance

would be before the situation arises. Ideally, of course, the student will never find himself or

herself in such a position, but, as the old saying goes, until youve walked a mile in anothers shoes

ANSWERS TO EXERCISES

Exercise 10-1

1. a 4. c

2. b 5. b

3. a


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Exercise 10-2

1. False Insolvency is the inability to pay debts as they become due. Classification as to current

and long-term is irrelevant.

2. True

3. True

4. False Secured creditors are paid first from the proceeds of sale of specific assets. If there are

proceeds remaining, unsecured creditors with priority will be paid before other

unsecured creditors.

5. True

6. False A gain on restructuring is measured by the excess of the carrying value of the payable

settled over the fair value of the assets transferred.

7. False Restructuring gains from troubled debt restructurings are reported by the debtor as a

separate component of operating income.

8. False The statement of affairs is a report that shows the estimated amount to be paid to each

class of claim in the event of liquidation.

Exercise 10-3

Part A Copyright 50,000

Gain on Transfer of Assets 50,000

To revalue the copyright to its current fair value. [$95,000 ($100,000 - $55,000)]

Notes Payable 150,000

Accrued Interest Payable 15,000

Accumulated Amortization Copyright 55,000 Copyright ($100,000 + $50,000) 150,000

Gain on Debt Restructuring 70,000

Part B The gain on transfer of assets ($50,000) should be reported as a separate component (assuming

material in amount) of operating income; the gain on restructuring ($70,000) should also be

reported as a separate component of operating income.

Part C Loss on Transfer of Assets 15,000

Copyright 15,000

To revalue the copyright to its current fair value. [$30,000 ($100,000 - $55,000)]



Accumulated Amortization Copyright 55,000 Copyright ($100,000 - $15,000) 85,000

Gain on Debt Restructuring ($165,000 - $30,000) 135,000


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Exercise 10-4

Part A No gain should be recognized because the total future cash payments specified by the new

terms of $1,144,250 ($995,000 carrying value plus 3 years interest at $49,750 per year) exceed the current carrying value of the debt, $995,000.

Part B Note Payable 900,000


Restructured Debt 995,000

Exercise 10-5

Part A A gain on restructuring should be recognized because the carrying value of the debt, $995,000,

exceeds the total future cash payments specified by the new terms, $744,000 ($600,000 face

value plus $144,000 interest). The gain of $251,000 should be reported as a separate

component of operating income.

Part B Notes Payable 900,000



Gain on Debt Restructuring 251,000

Part C Restructured Debt 48,000

Cash 48,000

Exercise 10-6

Realizable Value of all Assets $382,000

($190,000 + $90,000 + $102,000)

Allocated to:

Fully secured creditors (91,000)

Partially secured creditors (90,000)

Unsecured creditors with priority (30,000) Remainder available to general unsecured creditors $171,000

Payment rate to general unsecured creditors

(Including balance due to partially secured creditors)

$171,000 / ($350,000 + ($120,000 - $90,000)) 45%

Realizable Value of Assets:

Assets pledged to fully secured creditors $190,000

Assets pledged to partially secured creditors 90,000

Free assets 102,000

Total realizable value $382,000

Amounts to be paid to:

Fully secured creditors $ 91,000

Partially secured creditors [$90,000 + .45($30,000)] 103,500

Unsecured creditors with priority 30,000

General unsecured creditors .45($350,000) 157,500

Total $382,000


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Exercise 10-7

BALL COMPANY

Statement of Affairs

June 30, 2009

Book

Value

Assets

Realizable

Value

Assets Pledged with Fully Secured Creditors:

$180,000 Inventory $110,000

Note Payable 100,000 $ 10,000

Assets Pledged with Partially Secured Creditors:

170,000 Accounts Receivable 95,000

Note Payable 100,000

Free Assets

20,400 Cash 20,400

430,000 Property and Equipment 320,000

Total Net Realizable Value 350,400

Liabilities having Priority Wages 120,000 Net Free Assets 230,400

Estimated Deficiency to Unsecured Creditors 124,600

$800,400 $355,000

Equities

Unsecured

Liabilities Having Priority:

$120,000 Accrued Wages $120,000

Fully Secured Creditors:

100,000 Note Payable $100,000

Partially Secured Creditors:

100,000 Note Payable $100,000

Accounts Receivable 95,000 $ 5,000

Unsecured Creditors:

350,000 Accounts Payable 350,000

Stockholders Equity 400,000 Common Stock

(269,600) Retained Earnings (deficit)

$800,400 $355,000


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Exercise 10-7 (continued)

BALL COMPANY

Deficiency Account

June 30, 2009

Estimated Losses: Estimated Gains:

Accounts Receivable $ 75,000 Common Stock $ 400,000

Inventory 70,000 Retained Earnings (269,600)

Property and Equipment 110,000 Estimated Deficiency to Unsecured Creditors 124,600

$255,000 $255,000

Exercise 10-8

Part A Retained Earnings 52,700

Allowance for Uncollectibles ($48,700 - $40,000) 8,700

Property and Equipment ($142,000 - $118,000) 24,000

Goodwill 20,000

To record the revaluation of assets

Common Stock - $20 par 200,000

Common Stock - $4 par ($4 10,000) 40,000

Reorganization Capital 160,000

To record the exchange of $20 par common stock for $4 par common stock.

10% Bonds Payable 130,000


Common Stock (6,000 shares at $4 per share) 24,000

8% Bonds Payable 130,000

To record the exchange of 8% bonds and common stock for the 10% bonds.


Retained Earnings ($81,300 + $52,700) 134,000

To eliminate the deficit in retained earnings.


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Part B CRANE COMPANY

Balance Sheet

December 31, 2009

Cash $ 33,000

Accounts Receivable $ 52,500

Less Allowance for Uncollectibles 12,500 40,000

Inventory 71,000

Property and Equipment ($142,000 - $24,000) 118,000

Total Assets $262,000

Accounts Payable $ 66,000

8% Bonds Payable, due 6/30/2016 130,000

Common Stock, $4 par, 16,000 shares 64,000

Reorganization Capital ($160,000 $24,000 - $134,000) 2,000 Total Equities $262,000

Exercise 10-9

Cash 26,700

Accounts Receivable (old) 130,400

Inventory 191,900

Property and Equipment 590,400

Allowance for Uncollectibles (old) 16,000

Accumulated Depreciation 211,500

TRX Company in Receivership ($939,400 $16,000 - $211,500) 711,900 To record the receipt of TRX Company assets.

Cash 31,500

Accounts Receivable (new) 264,500

Sales 296,000

To record cash sales and sales on account.

Cash 319,000



Purchases 127,500

Accounts Payable (new) 127,500

To record purchases on account.

TRX Company in Receivership 206,500 Accounts Payable (new) 61,600

Operating Expenses 46,000

Trustee Expenses 13,000

Cash 327,100

To record cash payments.


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Bad Debt Expense 21,600

Depreciation Expense 32,400


Allowance for Uncollectibles (new) 8,600


To record estimated bad debts and depreciation expense.


Account Receivable (old) 21,000

To write off uncollectible accounts.

Sales 296,000

Inventory ($191,900 - $149,700) 42,200

Purchases 127,500





Income Summary 13,300

To close nominal accounts and to adjust inventory.

Income Summary 13,300

TRX Company in Receivership 13,300 To Close income summary account.


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Exercise 10-10 TRX COMPANY IN RECEVERSHIP

Combining Workpaper

December 31, 2009

Trial Balance Adjustments and Combined

TRX Eliminations Income Balance

Trustee Company Dr. Cr. Statement Sheet

Debits

Cash ($26,700 + $31,500 + $319,000 - $327,100) 50,100 50,100

Accounts Receivable (old) 53,600 53,600

Accounts Receivable (new) 22,300 22,300

Inventory 191,900 (1) 42,200 149,700

Property and Equipment 590,400 590,400

Purchases 127,500 (1) 127,500

Operating Expenses 46,000 46,000

Trustee Expenses 13,000 13,000

Bad Debt Expense 21,600 21,600

Depreciation Expense 32,400 32,400

Cost of Goods Sold ($191,900 + $127,500 - $149,700) (1) 169,700 169,700

Your Name, Trustee 505,400 (2) 505,400

Total 1,148,800 505,400 282,700 866,100

Credits

Allowance for Uncollectibles: (Old) 29,000 29,000

(New) 8,600 8,600

Accumulated Depreciation 243,900 243,900

Accounts Payable: (Old) 101,900 101,900

(New) 65,900 65,900

Capital Stock 800,000 800,000

Retained Earnings (Deficit) (396,500) (396,500)

Sales 296,000 296,000

TRX Company-in Receivership 505,400 (2) 505,400

Total 1,148,800 505,400 675,100 675,100 296,000

(13,300) 13,300

Net Income 282,700 866,100

(1) To adjust inventory and set up cost of goods sold.

(2) To eliminate reciprocal accounts.


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ANSWERS TO PROBLEMS

Problem 10-1

1. Accounts Payable 71,600

Cash ($71,600 .42) 30,072

Gain on Restructuring of Debt 41,528

2. Allowance for Uncollectible Accounts 19,450

Loss on Transfer of Assets 3,550

Accounts Receivable ($92,000 - $69,000) 23,000

Accounts Payable 132,400

Accounts Receivable 69,000

Gain on Restructuring of Debt ($132,400 - $69,000) 63,400

3. Accrued Expenses 14,620

Cash 14,620

4. Notes Payable 300,000


Cash 9,000


Gain on Restructuring of Debt ($327,000 - $309,000) 18,000

Problem 10-2

Part A

1. Allowance for Uncollectibles 16,750

Loss on Transfer of Assets 3,700

Accounts Receivable ($71,450 - $51,000) 20,450



Gain on Restructuring of Debt 18,000

2. Patents 8,000 Gain on Transfer of Asset ($50,000 - $42,000) 8,000 Accounts Payable 54,000 Patents 50,000 Gain on Restructuring of Debt 4,000 3. Accrued Wages 11,900 Cash 11,900 Accounts Payable ($142,700 - $69,000 - $54,000) 19,700

Cash ( .6 $19,700) 11,820 Gain on Restructuring of Debt 7,880


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Problem 10-2 (continued) 4. Notes Payable 57,000 Accrued Interest Payable 6,000 Restructured Debt due 1/2/11 63,000 Total future cash payments: Principal $63,000

Interest (6% $63,000) 2 7,560 Total 70,560 Carrying value $63,000 No gain recognized 5. Notes Payable 54,400 Accrued Interest Payable 11,900 Restructured Debt due 1/2/12 52,000 Gain on Restructuring of Debt 14,300 Total future cash payments: Principal ($54,400 - $14,400) $40,000

Interest (10% $40,000) 3 12,000 Total 52,000 Carrying value ($54,400 + $11,900) 66,300 Gain on Restructuring $14,300 6. Mortgage Note Payable 80,000 Accrued Interest Payable 20,500

Common Stock (100,000 $0.50) 50,000 Paid-in Capital in Excess of Par 9,000

Gain on Restructuring of Debt ($100,500 (100,000 $.59) 41,500

7, Common Stock ($290,000 (580,000 $.10) 232,000 Retained Earnings 66,820 Paid-in Capital in Excess of Par 165,180

Retained Earnings

Balance 1/2/09 156,800 Gain on restructuring (1) 18,000

Loss on transfer (1) 3,700 Gain on transfer (2) 8,000

Gain on restructuring (2) 4,000




Balance 66,820


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Problem 10-2 (continued)

Part B SRP COMPANY

Balance Sheet

January 2, 2009

Cash ($32,200 - $11,900 - $11,820) $ 8,480

Inventories 126,600

Plant and Equipment $322,000

Less Accumulated Depreciation 180,700 141,300

Land 20,800

Patents ($92,000 - $8,000 - $50,000) 50,000

Total $347,180

Restructured Debt Due 2009 $ 63,000 Due 2012 52,000

Common Stock, $ .10 par value,

580,000 shares outstanding 58,000

Paid-in Capital in Excess of Par 174,180

Retained Earnings since Reorganization on 1/2/09 - 0 -

Total $347,180

Part C 12/31/09

Interest Expense 3,780

Interest Payable ($63,000 .06) 3,780

No interest is accrued on the debt due in 2012 because all cash payments are reductions of the

carrying value of the debt.

1/2/10

Interest Payable 3,780

Cash 3,780


Cash ($52,000 .10) 5,200


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Problem 10-3

Part A

PROST COMPANY


December 31, 2009

Book

Value

Assets

Realizable

Value


$140,000 Land $200,000

400,000 Plant and Equipment 205,000 $405,000

Mortgage Payable 350,000

Accrued Interest 3,000 353,000 $ 52,000


60,000 Notes Receivable * 57,500

76,000 Accounts Receivable 55,000 112,500


Free Assets

2,500 Cash 2,500

4,000 Prepaid Expenses 4,000

Inventories:

43,000 Finished Goods (1) 47,515

60,000 Work in Process (2) 84,150

51,000 Raw Materials 18,000

12,000 Investment in Stock 19,000

10,000 Goodwill - 0 -


Liabilities having Priority Accrued Wages 45,000 Net Free Assets 182,165


$858,500 $332,500

* $60,000 - $2,500 = $57,500.


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Book

Value

Equities

Unsecured


$ 45,000 Accrued Wages $ 45,000


350,000 Mortgage Payable 350,000

Accrued Interest 3,000

$353,000


225,000 Bank Notes Payable 225,000

Notes Receivable $57,500

Accounts Receivable 55,000 112,500 $112,500



Stockholders Equity 380,000 Capital Stock

(361,500) Retained Earnings

$858,500 $332,500

(1) $43,000 1.3 = $55,900 .85 = $47,515

(2) ($60,000 + $30,000) 1.10 = $99,000 .85 = $84,150

Deficiency Account

December 31, 2009


Notes Receivable $ 2,500 Land $ 60,000

Accounts Receivable 21,000 Investment in Stock 7,000 Inventory * 4,335 Common Stock 380,000

Property and Equipment 195,000 Retained Earnings (361,500)

Goodwill 10,000 Estimated Deficiency

Unrecorded Accrued Interest 3,000 to Unsecured Creditors 150,335

$235,835 $235,835

* ($47,515 + $84,150 + $18,000) ($43,000 + $60,000 + $51,000)

Part B Estimated dividend to be paid general unsecured creditors:

Net free assets minus cash payment to complete work in process inventory

Total amount owed unsecured creditors

($182,165 - $11,000)/$332,500 = 51.6%


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Problem 10-4

BRAN COMPANY

Jim Brown, Trustee

Reconciliation and Liquidation Account

June 30, 2009 to December 31, 2009

Assets to be Realized Assets Realized

Receivables (old) $ 45,000 Receivables (old) $ 38,000

Less: Allowance for Uncollectibles 6,000 $ 39,000 Receivables (new) 85,000

Inventory 104,000 Plant and Equipment 39,000

Plant and Equipment 215,000

Less: Accumulated Depreciation 70,000 145,000 Assets Not Realized

Receivables (new) $ 15,000

Less: Allowance for Uncollectibles 2,000 13,000

Assets Acquired Inventory 75,000

Receivables (new) 100,000 Plant and Equipment * 151,000

Less: Accumulated Depreciation 55,000 96,000

Supplementary Charges

Purchases 35,000 Supplementary Credits

Operating Expenses 47,000 Sales 130,000

Trustee Expenses 2,000 Gain on Sale of Land 11,000

Loss on Sale of Equipment 12,000

Liabilities to be Liquidated

Liabilities Liquidated Accounts Payable (old) 145,000

Accounts Payable (old) 110,000

Accounts Payable (new) 30,000 Liabilities Incurred


Liabilities Not Liquidated

Accounts Payable (old) 35,000


Net Gain (1) 3,000

$667,000 $667,000

* ($215,000 - $14,000 - $50,000) = $151,000


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Cash

Balance June 30 15,000 Accounts Payable (old) 110,000

Sales 30,000 Accounts Payable (new) 30,000

Accounts Receivable (old) 38,000 Operating Expenses 47,000

Accounts Receivable (new) 85,000 Trustee Expenses 2,000

Sale of Land and Equipment 38,000

Balance 12/31 17,000

(1) Proof of Gain: Sales $ 130,000

Cost of Sales ($104,000 + $35,000 - $75,000) (64,000)

Operating Expenses (47,000)

Trustee Expenses (2,000)

Bad Debts Expense (3,000)

Depreciation Expense (10,000)

Gain on Sale of Land 11,000

Loss on Sale of Equipment (12,000)

Net Gain $ 3,000


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Problem 10-5

Part A Trustees Books Cash 4,500


Inventory 142,650




Plum Company in Receivership ($252,750 - $3,750 - $36,825) 212,175 To record the receipt of Plum Companys assets.

Cash 78,000


Sales 153,000

To record merchandise sales.

Cash 75,750



To record collection of accounts receivable.



Cash 14,850

To record cash expenses.



Allowance for Uncollectibles (new) 2,250


To record adjustment for bad debts and depreciation.


Accounts Receivable (old) ($15,000 $11,250) 3,750 To write off uncollectible accounts.

Plum Company in Receivership 143,175 Cash 143,175

To record payment of old accounts payable.

Cash 43,500

Accumulated Depreciation ($36,825 + $5,250) 42,075



To record the sale of property and equipment.


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Sales 153,000

Plum Company in Receivership 17,025 Inventory 142,650






To close income statement accounts.

Plum Company Books

Allowance for Uncollectibles 3,750


P. Smith, Trustee 212,175

Cash 4,500


Inventory 142,650


To record the transfer of assets to P. Smith.


P. Smith, Trustee 143,175

To record the payment of accounts payable by P. Smith.

Retained Earnings 17,025 P. Smith, Trustee 17,025

To record operating effects reported by P. Smith.


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Part B PLUM COMPANY IN RECEVERSHIP Combining Workpaper

For Five Months Ending October 31, 2009

Trial Balance Adjustments and Combined

PLUM Eliminations Income Balance

Trustee Company Dr. Cr. Statement Sheet

Debits

Cash * 43,725 43,725

Accounts Receivable (new) 10,500 10,500

Inventory 142,650 (1) 142,650

Operating Expenses 11,850 11,850

Trustee Expense 3,000 3,000

Bad Debt Expense 2,250 2,250

Depreciation Expense 5,250 5,250

Cost of Goods Sold (1) 142,650 142,650

Loss on Sale of Equipment 5,025 5,025

P Smith, Trustee 69,000 (2) 69,000

Total Debits $ 224,250 $ 69,000 $ 170,025 $ 54,225

Credits

Allowance for Uncollectibles: (New) 2,250 2,250

Capital Stock 135,000 135,000

Retained Earnings (Deficit) (66,000) (66,000)

Sales 153,000 153,000

Plum Company-in Receivership 69,000 (2) 69,000

Total Credits $ 224,250 $ 69,000 $211,650 $211,650 153,000

Net Loss 17,025 (17,025)

$ 170,025 $ 54,225

* $4,500 + $78,000 + $75,750 - $14,850 - $143,175 + $43,500

(1) To adjust inventory and set up cost of goods sold.

(2) To eliminate reciprocal accounts.


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Problem 10-6 PLUM COMPANY

P. Smith, Trustee

Realization and Liquidation Account

June 1, 2009 to October 31, 2009

* ($90,600 - $42,075) - $43,500 = $5,025

Cash

Opening Amount 4,500 Operating Expenses 11,850

Sales 78,000 Trustee Expense 3,000

Accounts Receivable 75,750 Accounts Payable 143,175

Sale of Land and Equipment 43,500

Balance 10/31 43,725

Assets to be Realized Assets Realized

Accounts Receivable (old) $15,000 Accounts Receivable (old) $ 11,250

Less: Allowance for Uncollectibles 3,750 $ 11,250 Accounts Receivable (new) 64,500

Inventory 142,650 Property and Equipment $90,600

Plant and Equipment 90,600 Less: Accumulated Depreciation 42,075 48,525

Less: Accumulated Depreciation 36,825 53,775

Assets Not Realized


Assets Acquired Less: Allowance for Uncollectibles 2,250 8,250


Supplementary Charges Supplementary Credits

Operating Expenses 11,850 Sales 153,000

Trustee Expense 3,000

Loss on Sale of Equipment * 5,025 Liabilities to be Liquidated


Liabilities Liquidated

Accounts Payable 143,175 Net Loss 17,025

$ 445,725 $ 445,725


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Problem 10-7

MINER COMPANY


May 31, 2009

Book

Value

Assets

Realizable

Value


$ 50,000 Notes Receivable $39,800

1,200 Accrued Interest Rec. 1,000 $ 40,800


Accrued Interest Pay. 800 40,800

119,000 Building 75,000

Note Payable 20,000

Accrued Interest Pay. 800 20,800 $ 54,200


13,200 Equipment 4,200

Note Payable 10,000

Free Assets

6,000 Cash 6,000

61,000 Accounts Receivable 50,000

60,000 Inventory 30,000

1,100 Prepaid Insurance 400

8,500 Goodwill - 0 -


Liabilities having Priority Wages 6,000 Taxes 2,400 8,400

Net Free Assets 132,200


$ 320,000 $ 185,800


10 - 25


Book

Value

Equities

Unsecured


$ 6,000 Accrued Wages $ 6,000

2,400 Taxes Payable 2,400 $ 8,400


60,000 Notes Payable 60,000

1,600 Accrued Interest Payable 1,600 61,600


10,000 Note Payable 10,000

Equipment 4,200 $ 5,800




Stockholders Equity 110,000 Common Stock

( 50,000) Retained Earnings (Deficit)

$ 320,000 $ 185,800

Deficiency Account

May 31, 2009


Accounts Receivable $ 11,000 Common Stock $ 110,000

Notes Receivable 10,400 Retained Earnings (50,000)

Inventory 30,000 Estimated Deficiency to

Buildings 44,000 Unsecured Creditors 53,600

Equipment 9,000

Prepaid Insurance 700

Goodwill 8,500

$113,600 $ 113,600

Estimated final dividend rate to unsecured creditors is: $132,200/$185,800 = 71.15%


10 - 26

Problem 10-8

Part A

DAVIS MANUFACTURING COMPANY


March 31, 2009

Book

Value

Assets

Realizable

Value


$ 115,500 Accounts Receivable * $ 88,500

Notes Payable 10,000 $ 78,500

66,250 Investment in Stock 100,000

Note Payable $41,000

Accrued Interest Pay. 1,750 42,750 57,250


50,000 Note Receivable 35,000

Note Payable 45,000

Accrued Interest Payable 1,000 46,000

105,000 Land 165,000

495,000 Buildings 260,000 425,000

Mortgage Note Payable 440,000

Accrued Interest Pay. 21,250 461,250

Free Assets

22,500 Cash 22,000

10,000 Note Receivable 10,000

1,375 Accrued Interest on Notes Receivable 1,375

140,000 Finished Goods Inventory (1) 151,200

97,500 Work-in-Process Inventory (2) 130,000

60,000 Raw Materials Inventory (3) 10,000

7,750 Supplies Inventory 1,300

3,000 Prepaid Expenses - 0 -

232,500 Equipment 100,000


Liabilities having Priority Wages $ 33,750 Taxes 5,250 39,000

Net Free Assets 522,625


$ 1,406,375 $ 734,750

* ($75,000 + ($40,500/3)) = $88,500.


10 - 27


Book Value

Equities

Unsecured


$ 33,750 Wages Payable $ 33,750

5,250 Payroll Taxes Payable 5,250



1,750 Accrued Interest Payable 1,750


45,000 Note Payable 45,000


46,000

Notes Receivable 35,000 11,000

440,000 Mortgage Note Payable 440,000


461,250

Land and Buildings 425,000 36,250




Stockholders Equity 469,000 Common stock

(349,125) Retained Earnings (Deficit)

$1,406,375 $ 734,750

(1) $140,000 1.20 = $168,000 - $16,800 = $151,200

(2) Estimated Selling Price $145,000

Less: Estimated Completion Costs Other

than Raw Materials 15,000

Realizable Value $130,000

(3) $60,000 - $40,000 = $20,000 .50 = $10,000


10 - 28


Part B

Deficiency Account

May 31, 2009


Cash $ 500 Land 60,000

Accounts Receivable 27,000 Investment in Stock 33,750

Notes Receivable 15,000 Common Stock 469,000

Inventory * 12,750 Retained Earnings (349,125)

Buildings 235,000 Estimated Deficiency to

Prepaid Expenses 3,000 Unsecured Creditors 212,125

Equipment 132,500

$425,750 $ 425,750

* ($140,000 + $97,500 + $60,000 + $7,750) ($151,200 + $130,000 + $10,000 + $1,300)

Part C Estimated dividend rate per dollar of general unsecured liabilities: $522,625/$734,750 = 71.1%


jeter aa 4e solutionsmanual ch10

Documents

creditors committee

general unsecured creditors

categories of unsecured

claims of governmental

involuntary petition

bankruptcy court

specific assets

debtor company