Chapter 10 strayer acc 401

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CHAPTER 10

ANSWERS TO QUESTIONS ANSWERS TO QUESTIONS

1.

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

merely extend the payment due date(s) for existing debts. Composition agreements.

Composition agreements. A composition agreement A composition agreement is an agreement between is an agreement between the debtor companythe debtor company and its creditors under which the creditors agree

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

Formatmation of ion of a a crecreditditor’or’s s comcommitmitteetee. . The debtoThe debtor r comcompanpany y and its crediand its creditortors s agragree to ee to forform m aa committee of creditors responsible for managing the debtor’s business affairs for the period during committee of creditors responsible for managing the debtor’s business affairs for the period during which plans are developed to rehabilitate, reorganize, or liquidate the business.

which plans are developed to rehabilitate, reorganize, or liquidate the business. Voluntary assignment of

Voluntary assignment of assets. assets. An insolvent debtor elects An insolvent debtor elects to voluntarily place his to voluntarily place his property under property under the control of a trustee for the benefit

the control of a trustee for the benefit of his creditors.of his creditors. 2.

2. In a In a voluntvoluntary petitioary petition, n, the debtor files a the debtor files a petitpetition with ion with a a bankrubankruptcy court for ptcy court for liquiliquidatiodation n under under Chapte

Chapter 7 or r 7 or for reorfor reorganizaganization under Chapttion under Chapter 11. er 11. The bankruptThe bankruptcy judge may refuscy judge may refuse a e a voluntvoluntaryary petition if refusal is considered to be in the

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

In an an invinvoluoluntantary ry petpetitiition, on, crecreditditors ors iniinititiate ate the the actaction ion by by filfiling ing a a petpetitiition on for for liliquiquidatdation ion or or reorganization with the bankruptcy court.

reorganization with the bankruptcy court. If there are twelve or If there are twelve or more creditors, the petition must more creditors, the petition must bebe signed by three or more of such creditors whose claims aggregate at least $5,000 more than the signed by three or more of such creditors whose claims aggregate at least $5,000 more than the val

value ue of any liens on of any liens on the propethe property of the debtorrty of the debtor. . If therIf there e are feweare fewer than twelvr than twelve e crecreditditorsors, , thethe petition may be filed by one or more of such creditors whose claims aggregate at least $5,000 more 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 debtor’s property. than the value of any liens on the debtor’s property. 3.

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

equal to or in excess of the claim. Partially secured clai

Partially secured claims. ms. Those claims with lThose claims with liens against specific assetiens against specific assets whose realizable value iss whose realizable value is less than the amount of the

less than the amount of the claim.claim. Unsecu

Unsecured claimred claims. s. Those claiThose claims that are not secured by liems that are not secured by liens against spens against specificific assets and are,c assets and are, there

therefore, paid from whatevfore, paid from whatever total money remainer total money remains after secured credits after secured creditors are satisfiors are satisfied. ed. SomeSome unsecured claims take priority over others under federal ban

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4.

4. The five categories The five categories of unsecured claimof unsecured claims with prioris with priority are:ty are: a.

a. Administrative Administrative expenses, fees, and expenses, fees, and charges incurred charges incurred in administin administering the bankrupt’s ering the bankrupt’s estate.estate. b.

b. UnsecuUnsecured claims for wagesred claims for wages, salarie, salaries, or commissis, or commissions earned by an ons earned by an emploemployee within 90 daysyee within 90 days before the date of filing a

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

c. Claims for contributions to employee benefit plans from services rendered within 180 daysClaims for contributions to employee benefit plans from services rendered within 180 days before the date of filing a p

before the date of filing a petition in bankruptcy, but subject to certain limitations.etition in bankruptcy, but subject to certain limitations. d.

d. Unsecured claims of individuals, to the extent of $2,100 for each such individual, arising fromUnsecured 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 the deposit of money in connection with the purchase, lease, or rental of property or services that were not delivered or performed.

that were not delivered or performed. e.

e. ClaClaims oims of govf governernmenmental utal unitnits for us for unpanpaid taid taxesxes.. 5.

5. Dividends represent Dividends represent the final the final distribution distribution made to made to general unsecured general unsecured creditors.creditors. a. Transfer of Assets:

a. Transfer of Assets: The transf

The transfer of assets by a debtor to a creditor generaer of assets by a debtor to a creditor generally produclly produces two types of gain or loss. es two types of gain or loss. AA gain on restructuring of debt is recognized for the excess of the carrying value of the payable gain on restructuring of debt is recognized for the excess of the carrying value of the payable over the fair value of the assets tra

over the fair value of the assets transfernsferred. red. This gain is reporThis gain is reported as a component of operatinted as a component of operatingg income.

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

the fair value and ue and book valbook value of ue of the assethe assets trants transfesferrerred. d. ThiThis gain (losss gain (loss) is ) is repreportorted as ed as aa component of operating income also.

component of operating income also. b. Grant of an Equity Interest:

b. Grant of an Equity Interest:

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

the fair value of the equity interest issued and the carrying amount of the payable ity interest issued and the carrying amount of the payable settled.settled. c. Modification of Terms:

c. Modification of Terms:

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

cash payments specints specified by the new terms are less thfied by the new terms are less than the carryinan the carrying value of the payable. g value of the payable. TheThe amount of gain is measure as the difference between the total future cash payments specified by 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.

the new terms and the carrying value of the payable. 7

7.. TThe she sttaatteemmeent ont of aff afffaaiirrs is as is an acn acccoouuntntiinng reg reppoorrt tht thaat is det is dessiiggnneed to ped to perrmmiit int intteerreesstteedd parties to determine the total expected amounts that could be realized from the disposition of a parties to determine the total expected amounts that could be realized from the disposition of a company’s assets, the priorities in the use of the realization proceeds in satisfying claims, and the company’s 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

potential net deficiency that would result if the assets were realized and claims liquidated.and claims liquidated. The officer is incorrect

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The primary duties of a trustee are: The primary duties of a trustee are:

a.

a. To be aTo be accoccountuntablable of ale of all prol properperty rty receeceiveived.d. b.

b. To examiTo examine proofs one proofs of claif claims and objems and object to the alct to the allowanclowance of any clae of any claim that iim that is imprs improper.oper. c.

c. To furnisTo furnish such inforh such informatiomation concernin concerning the estate and the estng the estate and the estate’s admate’s administinistratioration as is requesten as is requestedd by a party in interest.

by a party in interest. d.

d. If the busiIf the busineness of ss of ththe e dedebtbtor is or is auauththororizized ed to be to be opeoperarateted, fild, file e wiwith the courth the court t anand d wiwith anyth any governmental unit charged with responsibility for collection of any tax arising out of such governmental unit charged with responsibility for collection of any tax arising out of such operation, periodic reports and summaries of the

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

e. If the debtor has not done so, file with the court a list of creditors, a schedule of assets andIf 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 debtor’s financial affairs.

liabilities, and a statement of the debtor’s financial affairs. f.

f. If appliIf applicable, ficable, file a plan of reole a plan of reorganirganizationzation, and, if the pl, and, if the plan is accepan is accepted, filted, file such repoe such reports as arrts as aree required by the court.

required by the court. 10

10.. TThe phe pururpopose ose of a cf a comombibinining wng wororkpkpapaper ier is to ss to sererve ave as a mes a meanans by s by whwhiich tch the the trrusustteeee’’ss accounts are united with the debtor company’s accounts in order to prepare appropriate financial accounts are united with the debtor company’s accounts in order to prepare appropriate financial statements.

statements. 11

11.. ThThe purpe purposose of a e of a rerealalizizatatioion and liqn and liquiuidatdatioion n acaccocount is to reunt is to reporport sumt summamary rery realalizizatatioion andn and distribution activities

distribution activities of a trustee or rof a trustee or receiver to the court. eceiver to the court. It reports tIt reports the changes that have occurredhe changes that have occurred dur

during a ing a perperiod iod in in the monetathe monetary ry ititems becausems because e thathat t is is whawhat t the court the court offofficiicials are als are priprimarmarililyy interested in.

interested in.

BUSINESS ETHICS SOLUTIONS BUSINESS ETHICS SOLUTIONS

1.

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

must sell off any un-exempt assets to pay creditorscreditors. In contrast, Chapter 11 b. In contrast, Chapter 11 bankruptcy allowsankruptcy allows the firm the opportunity to reorganize its debt an

the firm the opportunity to reorganize its debt and to try to re-emerge as a healthy od to try to re-emerge as a healthy organization.rganization. In both cases, the creditors and other claim-holders suffer losses as they will be most likely 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 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 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

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

2

2.. The new lThe new law makeaw makes sweeps sweeping chaning changes to Ages to Americmerican bankruan bankruptcy lptcy laws and maws and makes it akes it moremore difficult for individuals to file bankruptcy under chapter 7. The new law requires a means test to difficult for individuals to file bankruptcy under chapter 7. The new law requires a means test to determine whether the borrowers have enough

determine whether the borrowers have enough resources to pay for their debts. For additionalresources to pay for their debts. For additional information, see the following link:

information, see the following link:

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

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

In addition the new law

In addition the new law laid down the following requirementslaid down the following requirements

•

• Mandatory credit counseling and debtor educationMandatory credit counseling and debtor education •

• Additional filing requirements and feesAdditional filing requirements and fees •

• Increased attorney liability and costsIncreased attorney liability and costs •

• Fewer automatic protections for Fewer automatic protections for filersfilers •

• Increased compliance requirements for small businessesIncreased compliance requirements for small businesses •

• Increased amount of debt repayment under Chapter 13Increased amount of debt repayment under Chapter 13 •

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These changes provide more

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

protected. Individuals who fail tIndividuals who fail the means test may opt ihe means test may opt instead for Chapter 13, which involves nstead for Chapter 13, which involves aa repayment of their debt over time.

repayment of their debt over time.

3.

3. Applying this test to businesses would benefit the creditors and other Applying this test to businesses would benefit the creditors and other claim-holders, as theyclaim-holders, as they would feel a slight buffer to their risk, which

would feel a slight buffer to their risk, which might stimulate new business as a result of easier might stimulate new business as a result of easier fund raising. It may also prevent businesses from venturing into und

fund raising. It may also prevent businesses from venturing into und uly risky areas as theyuly risky areas as they would not be able

would not be able to bail out as easily by filing under chapter to bail out as easily by filing under chapter 7 if things went wrong (hence7 if things went wrong (hence becoming somewhat more risk averse).

becoming somewhat more risk averse). It would seem to shiIt would seem to shift the risk balance somewhat ft the risk balance somewhat to theto the shoulders of the entrepreneur from those of the

shoulders of the entrepreneur from those of the investor.investor.

4.

4. Filing for bankruptcy is never a dFiling for bankruptcy is never a desirable or ethical option, but sometimes circumstances mayesirable or ethical option, but sometimes circumstances may arise that seem to for

arise that seem to force a business or an indice a business or an individual into this tough sitvidual into this tough situation. uation. Whether theWhether the individual finds another way at such a time or not is a personal issue and an ethical dilemma, individual finds another way at such a time or not is a personal issue and an ethical dilemma, and there is not necessarily

and there is not necessarily a correct answer to ta correct answer to this question. his question. The purpose of this disThe purpose of this discussion iscussion is to get the student to thinking

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

would be beforebefore the situation arises. the situation arises. Ideally, of course, the sIdeally, of course, the student will never find hitudent will never find himself or mself or herself in such a position, but, as

herself in such a position, but, as the old saying goes, until you’ve walked the old saying goes, until you’ve walked a mile in another’sa mile in another’s shoes… shoes… ANSWERS TO EXERCISES ANSWERS TO EXERCISES Exercise 10-1 Exercise 10-1 1 1. . aa 44. . cc 2 2. . bb 55. . bb 3. 3. aa

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Exercise 10-2 Exercise 10-2

1.

1. FaFalslsee InInsosolvlvenency cy is is ththe ie inanabibilility ty to to papay dy debebts ts as as ththey ey bebecocome me dudue. e. ClClasassisifificacatition aon as ts to co cururrerentnt and long-term is irrelevant.

and long-term is irrelevant. 2. True

2. True 3. True 3. True 4.

4. FaFalslsee SeSecucurered cd crerediditotors rs arare pe paiaid fd firirst st frfrom om ththe pre prococeeeeds ds of of sasale le of of spspececifific ic asassesetsts. . If If ththerere ae arere proceeds remaining, unsecured creditors with priority will be paid before other

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

unsecured creditors. 5. True

5. True 6.

6. FaFalslsee A gA gaiain on n on rereststruructctururining is g is memeasasurured ed by by ththe exe excecess ss of of ththe cae carrrryiying vng valalue ue of of ththe pae payayablblee settled over the fair value of the assets transferred.

settled over the fair value of the assets transferred. 7.

7. FaFalslsee ReReststruructctururining gag gainins fs frorom tm troroububleled ded debt bt rereststruructctururinings ags are rre repepororteted by d by ththe de debebtotor ar as as a separate component of operating income.

separate component of operating income. 8.

8. FaFalslsee ThThe se statatetemement ont of af affffaiairs rs is is a ra repeporort tt that hat shshowows ts the ehe eststimimatated aed amomoununt tt to bo be pae paid id to to eaeachch class of claim in the event of liquidation.

class of claim in the event of liquidation.

Part A

Part A CCooppyyrriigghhtt 5500,,000000

G

Gaaiin n oon n TTrraannssffeer r of of AAsssseetts s 5500,,000000 To revalue the copyright to its current fair value. [$95,000 – ($100,000 - $55,000)]

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

NootteessPPaayyaabbllee 115500,,000000 A

Accccrruueed d IInntteerreesst t PPaayyaabbllee 1155,,000000 A

Accccuummuullaatteed d AAmmoorrttiizzaattiioon n – – CCooppyyrriigghhtt 5555,,000000 C

Cooppyyrriigghht t (($$110000,,00000 0 + + $$5500,,000000) ) 115500,,000000 G

Gaaiin n oon n DDeebbt t ReessttrruR uccttuurriinngg 7700,,000000

Part B

Part B The gain on transfer of assets ($50,000) should The gain on transfer of assets ($50,000) should be reported as a separate cobe reported as a separate component (assumingmponent (assuming material in amount) of operating income; the ga

material in amount) of operating income; the gain on restructuring ($70,000) should also bein on restructuring ($70,000) should also be reported as a separate component of operating income.

reported as a separate component of operating income.

Part C

Part C LLoosss s oon n TTrraannssffeer r oof f AAsssseetts s 1155,,000000 C

Cooppyyrriigghhtt 1155,,000000

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

NootteessPPaayyaabbllee 115500,,000000 A

Accccrruueed d IInntteerreesst t PPaayyaabbllee 1155,,000000 A

Accccuummuullaatteed d AAmmoorrttiizzaattiioon n – – CCooppyyrriigghhtt 5555,,000000 C

Cooppyyrriigghht t (($$110000,,00000 0 - - $$1155,,000000) ) 8855,,000000 G

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Part A

Part A No gain should be recognized because the total future cash payments specified by the newNo gain should be recognized because the total future cash payments specified by the new terms of $1,144,250 ($995,000 ca

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

exceed the current carrying value of the debt, $995,000.

Part B

Part B Note Note Payable Payable 900,000900,000

Accrued

Accrued Interest Interest Payable Payable 95,00095,000 R

Reessttrruuccttuurreedd DDeebbtt 999955,,000000

Part A

Part A A gain on restructuring should be recognized because the carrying value of the debt, $995,000,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 exceeds the total future cash payments specified by the new terms, $744,000 ($600,000 face value plus $144,000 interest).

value plus $144,000 interest). The gain of $251,000 should be reported as a sThe gain of $251,000 should be reported as a separateeparate component of operating income.

component of operating income.

Part B

Part B Notes Notes Payable Payable 900,000900,000

Accrued

Accrued Interest Interest Payable Payable 95,00095,000 R

Reessttrruuccttuurreedd DDeebbtt 774444,,000000 Gain

Gain on on Debt Debt Restructuring Restructuring 251,000251,000

Part C

Part C Restructured Debt Restructured Debt 48,00048,000

C

Caasshh 4488,,000000

R

Reeaalliizzaabblle e VVaalluue e oof f aalll l AAsssseetts s $$338822,,000000 ($190,000 + $90,000 + $102,000)

($190,000 + $90,000 + $102,000) Allocated to:

Allocated to: F

Fuulllly y sseeccuurreed d ccrreeddiittoorrss ((9911,,000000)) P

Paarrttiiaalllly y sseeccuurreed d ccrreeddiittoorrss ((9900,,000000)) U

Unnsseeccuurreed d ccrreeddiittoorrs s wwiitth h pprriioorriitty y ((3300,,000000)) R

Reemmaaiinnddeer r aavvaaiillaabblle e tto o ggeenneerraal l uunnsseeccuurreed d ccrreeddiittoorrs s $$117711,,000000 Payment rate to general unsecured creditors

Payment rate to general unsecured creditors

(Including balance due to partially secured creditors) (Including balance due to partially secured creditors) $

$117711,,00000 0 / / (($$335500,,00000 0 + + (($$112200,,00000 0 - - $$9900,,000000)))) 445 5 %% Realizable Value of Assets:

Realizable Value of Assets: A

Asssseetts s pplleeddggeed d tto o ffuulllly y sseeccuurreed d ccrreeddiittoorrs s $$119900,,000000 Assets

Assets pledged pledged to to partially partially secured secured creditors creditors 90,00090,000 Free

Free assets assets 102,000102,000

T

Toottaal l rreeaalliizzaabblle e vvaalluue e $$338822,,000000 Amounts to be paid to:

Amounts to be paid to: F

Fuulllly y sseeccuurreed d ccrreeddiittoorrss $ $ 9911,,000000 P

Paarrttiiaalllly y sseeccuurreed d ccrreeddiittoorrs s [[$$9900,,00000 0 + + ..4455(($$3300,,000000))]] 110033,,550000 U

Unnsseeccuurreed d ccrreeddiittoorrs s wwiitth h pprriioorriittyy 3300,,000000 G

Geenneerraal l uunnsseeccuurreed d ccrreeddiittoorrs s ..4455(($$335500,,000000) ) 115577,,550000 T

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$262,000 $262,000 Exercise 10-9 Exercise 10-9 C Caasshh 2266,,770000 A

Accccoouunntts s RReecceeiivvaabblle e ((oolldd)) 131300,,440000

IInnvveennttoorryy 119911,,990000

P

Prrooppeerrtty y aannd d EEqquuiippmmeenntt 559900,,440000 A

Alllloowwaanncce e ffoor r UUnnccoolllleeccttiibbllees s ((oolldd) ) 1166,,000000 A

Accccuummuullaatteed d DeepD prreecciiaattiioonn 221111,,550000 T

TRRX X CCoommppaanny y – – iin n RReecceeiivveerrsshhiip p (($$993399,,44000 0 – – $$1166,,00000 0 - - $$221111,,550000)) 771111,,990000 To record the receipt of TRX Company assets.

To record the receipt of TRX Company assets. C

Caasshh 3311,,550000

A

Accccoouunntts s RReecceeiivvaabblle e ((nneeww)) 226644,,550000 S

Saalleess 229966,,000000

To record cash sales and sales on account. To record cash sales and sales on account. C

Caasshh 331199,,000000

A

Accccoouunntts s RReecceeiivvaabblle e ((oolldd)) 7766,,880000 A

Accccoouunntts s RReecceeiivvaabblle e ((nneeww)) 224422,,220000 P

Puurrcchhaasseess 112277,,550000

A

Accccoouunntts s PPaayyaabblle e ((nneeww)) 112277,,550000 To record purchases on account.

To record purchases on account. T

TRRX X CCoommppaanny y – – iin n RReecceeiivveerrsshhiipp 220066,,550000 A

Accccoouunntts s PPaayyaabblle e ((nneeww)) 6611,,660000 O

Oppeerraattiinngg EExxppeennsseess 4466,,000000 T

TrruusstteeeeEExxppeennsseess 1133,,000000 C

Caasshh 332277,,110000

To record cash payments. To record cash payments.

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Exercise 10-9 (continued) Exercise 10-9 (continued)

B

Baadd DDeebbttEExxppeennssee 2211,,660000 Depreciation

Depreciation Expense Expense 32,40032,400

A

Alllloowwaanncce e ffoor r UUnnccoolllleeccttiibbllees s ((oolldd)) 1133,,000000 A

Alllloowwaanncce e ffoor r UUnnccoolllleeccttiibbllees s ((nneeww)) 88,,660000 A

Accccuummuullaatteed d DeepD prreecciiaattiioonn 3322,,440000 To record estimated bad debts and depreciation expense.

To record estimated bad debts and depreciation expense. A

Accccoouunnt t RReecceeiivvaabblle e ((oolldd)) 2211,,000000 To write off uncollectible accounts.

To write off uncollectible accounts. S

Saalleess 229966,,000000

IInnvveennttoorry y (($$119911,,99000 0 - - $$114499,,770000)) 4422,,220000 P

Puurrcchhaasseess 112277,,550000

O

Trruusstteeee EExxppeennsseess 1133,,000000 B

Baadd DDeebbtt EExxppeennssee 2211,,660000 D

Deepprreecciiaattiioonn EExxppeennssee 3322,,440000 IInnccoommee SSuummmmaarryy 1133,,330000 To close nominal accounts and to adjust inventory.

To close nominal accounts and to adjust inventory.

IInnccoommee SSuummmmaarryy 1133,,330000 T

TRRX X CCoommppaanny y – – iin n RReecceeiivveerrsshhiipp 1133,,330000 To Close income summary account.

(9)

Exercise 10-10 Exercise 10-10 TRX COMPANY – IN RECEVERSHIP TRX COMPANY – IN RECEVERSHIP Combining Workpaper Combining Workpaper Decembe December 31, r 31, 20092009 T

Trriiaal l BBaallaannccee AdAdjjuussttmmeenntts s aanndd CCoommbbiinneedd T

TRRXX EElliimmiinnaattiioonnss IInnccoommee BBaallaannccee T

Trruusstteeee CCoommppaanny y Drr. D. CCrr.. SSttaatteemmeenntt SShheeeett Debits

Debits C

Caassh h (($$2266,,77000 0 + + $3$311,,55000 0 + + $$331199,,00000 0 - - $$332277,,110000)) 5500,,110000 5500,,110000 A

AccccoouunnttssRReecceeiivvaabbllee((oolldd)) 5533,,660000 5533,,660000 A

AccccoouunnttssRReecceeiivvaabbllee((nneeww)) 2222,,330000 2222,,330000 IInnvveennttoorryy 119911,,990000 ((11)) 4422,,220000 114499,,770000 P

PrrooppeerrttyyaannddEEqquuiippmmeenntt 559900,,440000 559900,,440000 P

Puurrcchhaasseess 112277,,550000 ((11)) 112277,,550000 O

OppeerraattiinnggEExxppeennsseess 4646,,000000 4466,,000000 T

TrruusstteeeeEExxppeennsseess 1133,,000000 1133,,000000 B

BaaddDDeebbttEExxppeennssee 2211,,660000 2211,,660000 D

DeepprreecciiaattiioonnEExxppeennssee 3232,,440000 3322,,440000 C

Coosst t oof f GGoooodds s SSoolld d (($$119911,,99000 0 + + $$112277,,55000 0 - - $$114499,,770000)) ((11) ) 161699,,77000 0 116699,,770000 Y

YoouurrNNaammee,,TTrruusstteeee 550055,,440000 ((22)) 550055,,440000 T

Toottaall 11,,114488,,880000 550055,,440000 228822,,770000 886666,,110000 Credits

Credits A

Alllloowwaanncce e ffoor r UUnnccoolllleeccttiibblleess: : ((OOlldd) ) 2299,,00000 0 2299,,000000 ((NNeeww)) 88,,660000 88,,660000 A

AccccuummuullaatteeddDDeepprreecciiaattiioonn 224433,,990000 224433,,990000 A

AccccoouunnttssPPaayyaabbllee:: ((OOlldd)) 110011,,990000 110011,,990000 ((NNeeww)) 6655,,990000 6655,,990000 C

CaappiittaallSSttoocckk 880000,,000000 880000,,000000 R

ReettaaiinneeddEEaarrnniinnggss((DDeeffiicciitt)) ((339966,,550000)) ((339966,,550000)) S

Saalleess 229966,,000000 229966,,000000 T

TRRX X CCoommppaannyy--iin n RReecceeiivveerrsshhiipp 550055,,440000 ((22)) 550055,,440000 T

Toottaall 11,,114488,,880000 550055,,440000 667755,,110000 667755,,110000 229966,,000000

((1133,,330000)) 1133,,330000 N

NeettIInnccoommee 228822,,770000 886666,,110000 (1) To adjust inventory and set up cost of goods sold.

(1) To adjust inventory and set up cost of goods sold. (2) To

(2) To eliminate reciprocal accounts.eliminate reciprocal accounts.

10 - 9 10 - 9

(10)

ANSWERS TO PROBLEMS ANSWERS TO PROBLEMS

Problem 10-1 Problem 10-1

1

1.. AAccccoouunnttssPPaayyaabbllee 7711,,660000 Cash ($71,600

Cash ($71,600×× ..4422)) 3300,,007722

G

Gaaiin n oon n RReessttrruuccttuurriinng g of of DDeebbt t 4411,,552288 2

2.. AAlllloowwaanncce e ffoor r UUnnccoolllleeccttiibblle e AAccccoouunntts s 1199,,445500 L

Loosss s oon n TTrraannssffeer r oof f AAsssseettss 33,,555500 A

Accccoouunntts s RReecceeiivvaabblle e (($$9922,,00000 0 - - $$6699,,000000) ) 2233,,000000 A

AccccoouunnttssPPaayyaabbllee 113322,,440000 A

AccccoouunnttssRReecceeiivvaabbllee 6699,,000000 G

Gaaiin n oon n RReessttrruuccttuurriinng g oof f DDeebbt t (($$113322,,44000 0 - - $$6699,,000000)) 6633,,440000 3

3.. AAccccrruueeddEExxppeennsseess 1144,,662200 C

Caasshh 1144,,662200

4

4.. NNootteessPPaayyaabbllee 330000,,000000 A

Accccrruueed d IInntteerreesst t PPaayyaabbllee 2277,,000000 C

Caasshh 99,,000000

R

Reessttrruuccttuurreedd DDeebbtt 330000,,000000 G

Gaaiin n oon n RReessttrruuccttuurriinng g oof f DDeebbt t (($$332277,,00000 0 - - $$330099,,000000)) 1188,,000000

Pro Probleblem m 10-10-33 Part A Part A PROST COMPANY PROST COMPANY Statement of Affairs Statement of Affairs December 31, 2009 December 31, 2009 Book Book V

Vaalluuee AAsssseettss

Realizable Realizable

Value Value Assets Pledged with Fully Secured Creditors:

Assets Pledged with Fully Secured Creditors: $

$114400,,00000 0 LLaanndd $$220000,,000000 4

40000,,00000 0 PPllaannt t aannd d EEqquuiippmmeenntt 220055,,000000 $$440055,,000000 M

Moorrttggaagge e PPaayyaabbllee 335500,,000000 A

Accccrruueed d IInntteerreesstt 33,,000000 335533,,000000 $ $ 5522,,000000 Assets Pledged with Partially Secured Creditors:

Assets Pledged with Partially Secured Creditors: 6

600,,000000 NNoottees s RReecceeiivvaabblle e ** 5577,,550000 7

766,,00000 0 AAccccoouunntts s RReecceeiivvaabbllee 5555,,000000 111122,,550000 N

Noottees s PPaayyaabbllee 222255,,000000 Free Assets

Free Assets 2

2,,550000 CCaasshh 22,,550000

4

(11)

Inventories: Inventories: 4

433,,00000 0 FFiinniisshheed d GGoooodds s ((11)) 4477,,551155 6

600,,00000 0 WWoorrk k iin n PPrroocceesss s ((22)) 8844,,115500 5

511,,00000 0 RRaaw w MMaatteerriiaallss 1188,,000000 1

122,,000000 IInnvveessttmmeennt t iin n SSttoocckk 1199,,000000 1

100,,000000 GGooooddwwiillll -- 00 --T

Toottaal l NNeet t RReeaalliizzaabblle e VVaalluuee 222277,,116655 L

Liiaabbiilliittiiees s hhaavviinng g PPrriioorriitty y – – AAccccrruueed d WWaaggeess 4455,,000000 N

Neet t FFrreee e AAsssseettss 118822,,116655 E

Essttiimmaatteed Dd Deeffiicciieennccy ty to Uo Unnsseeccuurreed Cd Crreeddiittoorrss 115500,,333355 $

$885588,,550000 $$333322,,550000 * $60,000 - $2,500 = $57,500.

(12)

Problem 10-3 (continued) Problem 10-3 (continued)

Book Book V

Vaalluuee EEqquuiittiieess

Unsecure Unsecure

d d Liabilities Having Priority:

Liabilities Having Priority: $

$ 4455,,000000 AAccccrruueed d WWaaggees s $ $ 4455,,000000 Fully Secured Creditors:

Fully Secured Creditors: 3

35500,,000000 MMoorrttggaagge e PPaayyaabblle e 335500,,000000 A

Accccrruueed d IInntteerreesst t 33,,000000 $353,000 $353,000 Partially Secured Creditors:

Partially Secured Creditors: 2

22255,,000000 BBaannk k NNoottees s PPaayyaabblle e 222255,,000000 N

Noottees s RReecceeiivvaabbllee $$5577,,550000 A

Accccoouunntts s RReecceeiivvaabblle e 5555,,00000 0 111122,,550000 $$111122,,550000 Unsecured Creditors:

Unsecured Creditors: 2

22200,,000000 AAccccoouunntts s PPaayyaabblle e 222200,,000000 Stockholders’ Equity

Stockholders’ Equity 3

38800,,000000 CCaappiittaal l SSttoocck k (361,5

(361,500) 00) RetaineRetained d EarningEarningss $858, $858,500 500 $332,$332,500500 (1) (1) $43,000$43,000 ×× 1.3 = $55,9001.3 = $55,900×× .85 = $47,515.85 = $47,515 (2) (2) ($60,000 + $30,000)($60,000 + $30,000)×× 1.10 1.10 = = $99,000$99,000×× .85 = $84,150.85 = $84,150 Deficiency Account Deficiency Account December 31, 2009 December 31, 2009 E

Essttiimmaatteed d LLoosssseess:: EEssttiimmaatteed d GGaaiinnss:: N

Noottees s RReecceeiivvaabbllee $ $ 22,,55000 0 LLaanndd $ $ 6600,,000000 Accounts Receivable

Accounts Receivable 2211,,00000 0 IInnvveessttmmeennt t iin n SSttoocck k 77,,000000 IInnvveennttoorry y * * 44,,33335 5 CCoommmmoon n SSttoocck k 338800,,000000 P

Prrooppeerrtty y aannd d EEqquuiippmmeenntt 119955,,000000 RReettaaiinneed d EEaarrnniinnggs s ((336611,,550000)) G

Gooooddwwiillll 1100,,000000 EEssttiimmaatteed d DDeeffiicciieennccyy U

Unnrreeccoorrddeed d AAccccrruueed d IInntteerreesst t 33,,00000 0 tto o UUnnsseeccuurreed d CCrreeddiittoorrs s 115500,,333355 $

$223355,,88335 5 $$223355,,883355 * ($47,515 + $84,150 + $18,000) – ($43,000 + $60,000 + $51,000)

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

Part B

Part B Estimated dividend to be paid general unsecured creditors:Estimated dividend to be paid general unsecured creditors:

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

Total amount owed unsecured creditors Total amount owed unsecured creditors ($182,165 - $11,000)/$332,500 = 51.6% ($182,165 - $11,000)/$332,500 = 51.6%

(13)

Part A

Part A Trustee’s BooksTrustee’s Books C

Caassh h 44,,550000

A

Accccoouunntts s RReecceeiivvaabblle e ((oolldd) ) 1155,,000000

P

Prrooppeerrtty y aannd d EEqquuiippmmeenntt 9900,,660000 Allowance

Allowance for for Uncollectibles Uncollectibles (old) (old) 3,7503,750 A

Accccuummuullaatteed d DDeepprreecciiaattiioon n 3366,,882255 P

Plluum m CCoommppaanny y – – iin n RReecceeiivveerrsshhiip p (($$225522,,77550 0 - - $$33,,77550 0 - - $$3366,,882255)) 221122,,117755 To record the receipt of

To record the receipt of Plum Company’s assets.Plum Company’s assets. C

Caasshh 7788,,000000

A

Saalleess 115533,,000000

To record merchandise sales. To record merchandise sales. C

Caasshh 7755,,775500

A

Accccoouunntts s RReecceeiivvaabblle e ((oolldd)) 1111,,225500 A

Accccoouunntts s RReecceeiivvaabblle e ((nneeww)) 6644,,550000 To record collection of accounts receivable.

To record collection of accounts receivable. O

Trruusstteeee EExxppeennsseess 33,,000000 C

Caasshh 1144,,885500

To record cash expenses. To record cash expenses. B

BaaddDDeebbtt EExxppeennssee 22,,225500 D

Deepprreecciiaattiioonn EExxppeennssee 55,,225500 A

Alllloowwaanncce e ffoor r UUnnccoolllleeccttiibbllees s ((nneeww)) 22,,225500 A

Accccuummuullaatteed d DDeepprreecciiaattiioonn 55,,225500 To record adjustment for bad debts

To record adjustment for bad debts and depreciation.and depreciation. A

Accccoouunntts s RReecceeiivvaabblle e ((oolldd) ) (($$1155,,00000 0 – – $$1111,,225500)) 33,,775500 To write off uncollectible accounts.

To write off uncollectible accounts. P

Plluum m CCoommppaanny y – – iin n RReecceeiivveerrsshhiipp 114433,,117755 C

Caasshh 114433,,117755

To record payment of old accounts payable. To record payment of old accounts payable. C

Caasshh 4433,,550000

A

Accccuummuullaatteed d DDeepprreecciiaattiioon n (($$3366,,88225 5 + + $$55,,225500)) 4422,,007755 L

Loosss s oon n SSaalle e oof f EEqquuiippmmeenntt 55,,002255 P

Prrooppeerrtty y aannd d EEqquuiippmmeenntt 9900,,660000 To record the sale of p

(14)

S

Saallees s 115533,,000000

P

Plluum m CCoommppaanny y – – iin n RReecceeiivveerrsshhiip p 1177,,002255

Inventory 142,650

O

Trruusstteeee EExxppeennsseess 33,,000000 B

BaaddDDeebbtt EExxppeennssee 22,,225500 D

Deepprreecciiaattiioonn EExxppeennssee 55,,225500 L

Loosss s oon n SSaalle e oof f EEqquuiippmmeenntt 55,,002255 To close income statement accounts.

To close income statement accounts. Plum Company Books

Plum Company Books A

Alllloowwaanncce e ffoor r UnUnccoolllleeccttiibbllees s 33,,775500 A

Accccuummuullaatteed d DDeepprreecciiaattiioonn 3366,,882255 P

P..SmSmiitthh,,TrruT usstteeee 221122,,117755

Cash 4,500

A

AccccoouunnttssRReecceeiivvaabbllee 1155,,000000

P

Prrooppeerrtty y aannd d EEqquuiippmmeenntt 9900,,660000 To record the transfer of assets to P.

To record the transfer of assets to P. Smith.Smith. A

AccccoouunnttssPPaayyaabbllee 114433,,117755 P

P..SSmmiitthh,,TTrruusstteeee 114433,,117755 To record the payment of accou

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

Retained Earnings Earnings 17,02517,025

P

P.. SSmmiitthh,,TrruT usstteeee 1177,,002255 To record operating effects reported by P.

(15)

Problem 10-5 (continued) Problem 10-5 (continued) Part B

Part B PLUM COMPANY – IN PLUM COMPANY – IN RECEVERSHIPRECEVERSHIP Combining Workpaper

Combining Workpaper

For Five Months Ending October 31, 2009 For Five Months Ending October 31, 2009

T

Trriiaal l BBaallaannccee AAddjjuussttmmeenntts s aanndd CCoommbbiinneedd P

PLLUUMM EElliimmiinnaattiioonnss IInnccoommee BBaallaannccee T

Trruusstteeee CCoommppaanny y Drr. D. CCrr.. SSttaatteemmeenntt SShheeeett Debits

Debits C

Caasshh** 4433,,772255 4433,,772255

A

AccccoouunnttssRReecceeiivvaabbllee((nneeww)) 1100,,550000 1100,,550000 IInnvveennttoorryy 114422,,665500 ((11)) 114422,,665500

O

OppeerraattiinnggEExxppeennsseess 1111,,885500 1111,,885500 T

TrruusstteeeeEExxppeennssee 3,,0300000 33,,000000 B

BaaddDDeebbttEExxppeennssee 22,,225500 22,,225500 D

DeepprreecciiaattiioonnEExxppeennssee 55,,225500 55,,225500 C

Coosst t oof f GGoooodds s SSoolldd ((11)) 114422,,66550 0 114422,,665500 L

Loosss s oon n SSaalle e oof f EEqquuiippmmeenntt 55,,00225 5 55,,002255 P

PSSmmiitthh,,TTrruusstteeee 6699,,000000 ((22)) 6699,,000000 T

Toottaal l DDeebbiittss $ $ 222244,,225500 $ $ 6699,,000000 $ $ 117700,,002255 $ $ 5544,,222255 Credits

Credits A

Alllloowwaanncce e ffoor r UUnnccoolllleeccttiibblleess: : ((NNeeww) ) 22,,22550 0 22,,225500 C

CaappiittaallSSttoocckk 113355,,000000 113355,,000000 R

Reettaaiinneed d EEaarrnniinnggs s ((DDeeffiicciitt)) ((6666,,000000)) ((6666,,000000)) S

Saalleess 115533,,000000 115533,,000000

P

Plluum m CCoommppaannyy--iin n RReecceeiivveerrsshhiipp 6699,,000000 ((22)) 6699,,000000 T

Toottaal l CCrreeddiittss $ $ 222244,,225500 $ $ 6699,,000000 $2$21111,,665500 $$221111,,665500 115533,,000000 N NeettLLoossss 1177,,002255 ((1177,,002255)) $ $ 117700,,002255 $ $ 5544,,222255 * $4,500 + $78,000 + $75,750 - $14,850 - $143,175 + $43,500 * $4,500 + $78,000 + $75,750 - $14,850 - $143,175 + $43,500 (1) To adjust inventory and set up cost of goods sold.

(1) To adjust inventory and set up cost of goods sold. (2) To eliminate reciprocal accounts.

(2) To eliminate reciprocal accounts.

10 - 15 10 - 15

(16)

Problem 10-6 Problem 10-6 PLUM COMPANY PLUM COMPANY P. Smith, Trustee P. Smith, Trustee

Realization and Liquidation Account Realization and Liquidation Account

June 1, 2009 to October 31, 2009 June 1, 2009 to October 31, 2009 * ($90,600 - $42,075) - $43,500 = $5,025 * ($90,600 - $42,075) - $43,500 = $5,025 Cash Cash O

Oppeenniinng g AAmmoouunntt 44,,550000 OOppeerraattiinng g EExxppeennsseess 1111,,885500 S

Saalleess 7788,,00000 T0 Trruusstteee e EExxppeennssee 33,,000000 A

Accccoouunntts s RReecceeiivvaabbllee 7755,,775500 AAccccoouunntts s PPaayyaabbllee 114433,,117755 S

Saalle e oof f LLaannd d aannd d EEqquuiippmmeenntt 4433,,550000 B

Baallaanncce e 1100//3311 4433,,772255

10 - 16 10 - 16 A

Asssseetts s tto o bbe e RReeaalliizzeedd AAsssseetts s RReeaalliizzeedd A

Accccoouunntts s RReecceeiivvaabblle e ((oolldd)) $$1155,,00000 0 AAccccoouunntts s RReecceeiivvaabblle e ((oolldd)) $ $ 1111,,225500 L

Leessss: : AAlllloowwaanncce e ffoor r UUnnccoolllleeccttiibblleess 33,,775500 $ 1$ 111,,22550 0 AAccccoouunntts s RReecceeiivvaabblle e ((nneeww)) 6644,,550000 IInnvveennttoorry y 114422,,66550 0 PPrrooppeerrtty y aannd d EEqquuiippmmeenntt $$9900,,660000

P

Pllaannt t aannd d EEqquuiippmmeenntt 9900,,66000 0 LLeessss: : AAccccuummuullaatteed d DDeepprreecciiaattiioonn 4422,,007755 4488,,552255 L

Leessss: : AAccccuummuullaatteed d DDeepprreecciiaattiioonn 3366,,882255 5533,,777755

Assets Not Realized Assets Not Realized

A

Accccoouunntts s RReecceeiivvaabblle e ((nneeww)) 1100,,550000 A

Asssseetts s AAccqquuiirreed d Leessss: L : AAlllloowwaanncce e ffoor r UUnnccoolllleeccttiibblleess 22,,225500 88,,225500 A

Suupppplleemmeennttaarry y CChhaarrggeess SSuupppplleemmeennttaarry y CCrreeddiittss O

OppeerraattiinnggEExxppeennsseess 1111,,885500 S Saalleess 115533,,000000 T

TrruusstteeeeEExxppeennssee 33,,000000 L

Loosss s oon n SSaalle e oof f EEqquuiippmmeennt t ** 55,,002255 LLiiaabbiilliittiiees s tto o bbe e LLiiqquuiiddaatteedd A

Accccoouunntts s PPaayyaabbllee 114433,,117755 Liabilities Liquidated

Liabilities Liquidated A

AccccoouunnttssPPaayyaabbllee 114433,,117755 NNeettLLoossss 1177,,002255 $

(17)

Problem 10-7 Problem 10-7 MINER COMPANY MINER COMPANY Statement of Affairs Statement of Affairs May 31, 2009 May 31, 2009 Book Book V

Assets Pledged with Fully Secured Creditors: $

$ 5500,,00000 0 NNoottees s RReecceeiivvaabbllee $$3399,,880000 1

1,,22000 0 AAccccrruueed d IInntteerreesst t RReecc.. 11,,000000 $ 4$ 400,,880000 N

Noottees s PPaayyaabbllee 4400,,000000 A

Accccrruueed d IInntteerreesst t PPaayy.. 808000 4400,,880000 1

11199,,000000 BBuuiillddiinngg 7755,,000000 N

Nootte e PPaayyaabbllee 2200,,000000 A

Accccrruueed d IInntteerreesst t PPaayy.. 880000 2020,,880000 $ 5$ 544,,220000 Assets Pledged with Partially Secured Creditors:

133,,22000 0 EEqquuiippmmeenntt 44,,220000 N

Nootte e PPaayyaabbllee 1100,,000000 Free Assets

Free Assets 6

6,,000000 CCaasshh 66,,000000

6

611,,000000 AAccccoouunntts s RReecceeiivvaabbllee 5500,,000000 6

600,,000000 IInnvveennttoorryy 3300,,000000 1

1,,110000 PPrreeppaaiid d IInnssuurraannccee 440000 8

8,,550000 GGooooddwwiillll -- 00 --T

Toottaal l NNeet t RReeaalliizzaabblle e VVaalluuee 114400,,660000 Liabilities

Liabilities having having Priority Priority – – Wages Wages 6,0006,000 T

Taaxxeess 22,,440000 88,,440000 N

Essttiimmaatteed d DDeeffiicciieennccy y tto o UUnnsseeccuurreed d CCrreeddiittoorrss 5533,,660000 $

(18)

Pro

Probleblem 10 m 10 - - 7 (c7 (contontinuinued)ed)

Book Book V

Vaalluuee EEqquuiittiieess

Unsecure Unsecure

d d Liabilities Having Priority:

$ 66,,000000 AAccccrruueed d WWaaggeess $ $ 66,,000000 2

2,,440000 TTaaxxees s PPaayyaabbllee 22,,440000 $ $ 88,,440000 Fully Secured Creditors:

600,,000000 NNoottees s PPaayyaabbllee 6600,,000000 1

1,,660000 AAccccrruueed d IInntteerreesst t PPaayyaabbllee 11,,660000 6611,,660000 Partially Secured Creditors:

100,,00000 0 NNootte e PaayP yaabbllee 1100,,000000 E

Eqquuiippmmeenntt 44,,220000 $ $ 55,,880000 Unsecured Creditors:

17700,,000000 AAccccoouunntts s PPaayyaabbllee 117700,,000000 1

100,,000000 NNoottees s PPaayyaabbllee 1100,,000000 Stockholders’ Equity

11100,,000000 CCoommmmoon n SSttoocck k (

( 5050,0,00000)) ReRetatainined ed EaEarnrninings gs (D(Defeficicitit)) $ $332200,,000000 $$118855,,880000 Deficiency Account Deficiency Account May 31, 2009 May 31, 2009 E

Essttiimmaatteed d LLoosssseess:: EEssttiimmaatteed d GGaaiinnss:: A

Accccoouunntts s RReecceeiivvaabbllee $ $ 1111,,00000 0 CCoommmmoon n SSttoocck k $ $ 111100,,000000 N

Noottees s RReecceeiivvaabbllee 1100,,44000 0 RReettaaiinneed d EEaarrnniinnggss ((5500,,000000)) IInnvveennttoorryy 3300,,00000 0 EEssttiimmaatteed d DDeeffiicciieennccy y ttoo

B

Buuiillddiinnggss 4444,,00000 0 UUnnsseeccuurreed d CCrreeddiittoorrs s 5533,,660000 E

Eqquuiippmmeenntt 99,,000000 P

Prreeppaaiid d IInnssuurraannccee 770000 G

Gooooddwwiillll 88,,550000 $

$111133,,660000 $$111133,,660000 Estimated final dividend rate to unsecured creditors is: $132,200/$185,

(19)

Part A Part A

DAVIS MANUFACTURING COMPANY DAVIS MANUFACTURING COMPANY

Statement of Affairs Statement of Affairs March 31, 2009 March 31, 2009 Book Book V

Assets Pledged with Fully Secured Creditors: $ 1

$ 11155,,55000 0 AAccccoouunntts s RReecceeiivvaabblle e ** $ $ 8888,,550000 N

Noottees s PPaayyaabbllee 1100,,000000 $ $ 7788,,550000 6

666,,22550 0 IInnvveessttmmeennt t iin n SSttoocckk 110000,,000000 N

Nootte e PPaayyaabbllee $$4411,,000000 A

Accccrruueed d IInntteerreesst t PPaayy.. 11,,775500 4422,,775500 5577,,225500 Assets Pledged with Partially Secured Creditors:

500,,00000 0 NNootte e RReecceeiivvaabbllee 3355,,000000 N

Nootte e PPaayyaabbllee 4455,,000000 A

Accccrruueed d IInntteerreesst t PPaayyaabbllee 1,,0100000 4466,,000000 1

10055,,00000 0 LLaanndd 116655,,000000 4

49955,,00000 0 BBuuiillddiinnggss 262600,,000000 442255,,000000 M

Moorrttggaagge Ne Nootte Pe Paayyaabbllee 444400,,000000 A

Accccrruueed d IInntteerreesst t PPaayy.. 2211,,225500 446611,,225500 Free Assets

Free Assets 2

222,,550000 CCaasshh 2222,,000000 1

100,,000000 NNootte e RReecceeiivvaabbllee 1100,,000000 1

1,,33775 5 AAccccrruueed d IInntteerreesst t oon n NNoottees s RReecceeiivvaabbllee 11,,337755 1

14400,,00000 0 FFiinniisshheed d GGoooodds s IInnvveennttoorry y ((11)) 115511,,220000 9

977,,55000 0 WWoorrkk--iinn--PPrroocceesss s IInnvveennttoorry y ((22)) 113300,,000000 6

600,,000000 RRaaw w MMaatteerriiaalls s IInnvveennttoorryy ((33)) 1100,,000000 7

7,,775500 SSuupppplliiees s IInnvveennttoorryy 11,,330000 3

3,,000000 PPrreeppaaiid d EExxppeennsseess - - 0 0 --2

23322,,55000 0 EEqquuiippmmeenntt 110000,,000000 T

Toottaal l NNeet t RReeaalliizzaabblle e VVaalluuee 556611,,662255 Liabilities

Liabilities having having Priority Priority – – Wages Wages $ $ 33,75033,750 T

Taaxxeess 55,,225500 3399,,000000 N

Essttiimmaatteed Dd Deeffiicciieennccy ty to Uo Unnsseeccuurreed Cd Crreeddiittoorrss 221122,,112255 $

$ 11,,440066,,337755 $$ 773344,,775500 * ($75,000 + ($40,500/3)) = $88,500.

(20)

B

Booook k VVaalluuee EEqquuiittiieess UnsecuredUnsecured Liabilities Having Priority:

$ 3333,,775500 WWaaggees s PPaayyaabbllee $ $ 3333,,775500 5

5,,225500 PPaayyrroolll l TTaaxxees s PPaayyaabbllee 55,,225500 Fully Secured Creditors:

511,,000000 NNoottees s PPaayyaabbllee 5511,,000000 1

1,,775500 AAccccrruueed d IInntteerreesst t PPaayyaabbllee 11,,775500 Partially Secured Creditors:

455,,00000 0 NNootte e PPaayyaabbllee 4455,,000000 1

1,,00000 0 AAccccrruueed d IInntteerreesst t PPaayyaabbllee 11,,000000 46,000 46,000 N

Noottees s RReecceeiivvaabbllee 3355,,000000 1111,,000000 4

44400,,00000 0 MMoorrttggaagge e NNootte e PPaayyaabbllee 444400,,000000 2

211,,22550 0 AAccccrruueed d IInntteerreesst t PPaayyaabbllee 2211,,225500 461,250 461,250 L

Laannd d aannd d BBuuiillddiinnggss 424255,,000000 3366,,225500 Unsecured Creditors:

58877,,550000 AAccccoouunntts s PPaayyaabbllee 558877,,550000 1

10000,,000000 NNoottees s PPaayyaabbllee 110000,,000000 Stockholders’ Equity

46699,,000000 CCoommmmoon n ssttoocck k (349,125

(349,125) ) RetaineRetained d EarninEarnings gs (Deficit)(Deficit) $

$ 1,1,40406,6,37375 5 $ $ 73734,4,757500 (1) $140,000

(1) $140,000×× 1.20 = $168,000 - $16,800 = $151,2001.20 = $168,000 - $16,800 = $151,200

((22) ) EEssttiimmaatteed d SSeelllliinng g PPrriiccee $$114455,,000000 Less: Estimated Completion Costs Other

Less: Estimated Completion Costs Other

tthhaan n RRaaw w MMaatteerriiaalls s 1155,,000000 R

Reeaalliizzaabblle e VVaalluuee $$113300,,000000 (3)

(21)

Problem 10-8 (continued) Problem 10-8 (continued) Part B Part B Deficiency Account Deficiency Account May 31, 2009 May 31, 2009 E

Essttiimmaatteed d LLoosssseess:: EEssttiimmaatteed d GGaaiinnss:: C

Caasshh $$ 550000 Laan L ndd 6600,,000000 A

Accccoouunntts s RReecceeiivvaabbllee 2277,,00000 0 IInnvveessttmmeennt t iin n SSttoocck k 3333,,775500 N

Noottees s RReecceeiivvaabbllee 1155,,00000 0 CCoommmmoon n SSttoocckk 446699,,000000 IInnvveennttoorry y ** 1122,,77550 0 RReettaaiinneed d EEaarrnniinnggss ((334499,,112255)) B

Buuiillddiinnggss 223355,,00000 0 EEssttiimmaatteed d DDeeffiicciieennccy y ttoo P

Prreeppaaiid d EExxppeennsseess 33,,00000 0 UnUnsseeccuurreed d CCrreeddiittoorrss 221122,,112255 E Eqquuiippmmeenntt 113322,,550000 $ $442255,,775500 $$ 442255,,775500 * ($140,000 + $97,500 + $60,000 + $7,750) – ($151,200 + $130,000 + $10,000 + $1,300) * ($140,000 + $97,500 + $60,000 + $7,750) – ($151,200 + $130,000 + $10,000 + $1,300) Part C