Jeter AA 4e SolutionsManual Ch10
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Transcript of Jeter AA 4e SolutionsManual Ch10
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10 - 1
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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10 - 2
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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10 - 3
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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10 - 4
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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10 - 5
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)]
Notes Payable 150,000
Accrued Interest Payable 15,000
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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10 - 6
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
Accrued Interest Payable 95,000
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
Accrued Interest Payable 95,000
Restructured Debt 744,000
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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10 - 7
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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10 - 8
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
Reorganization Capital 24,000
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.
Reorganization Capital 134,000
Retained Earnings ($81,300 + $52,700) 134,000
To eliminate the deficit in retained earnings.
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10 - 9
Exercise 10-8 (continued)
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
Accounts Receivable (old) 76,800
Accounts Receivable (new) 242,200
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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10 - 10
Exercise 10-9 (continued)
Bad Debt Expense 21,600
Depreciation Expense 32,400
Allowance for Uncollectibles (old) 13,000
Allowance for Uncollectibles (new) 8,600
Accumulated Depreciation 32,400
To record estimated bad debts and depreciation expense.
Allowance for Uncollectibles (old) 21,000
Account Receivable (old) 21,000
To write off uncollectible accounts.
Sales 296,000
Inventory ($191,900 - $149,700) 42,200
Purchases 127,500
Operating Expenses 46,000
Trustee Expenses 13,000
Bad Debt Expense 21,600
Depreciation Expense 32,400
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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10 - 11
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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10 - 12
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
Accrued Interest Payable 27,000
Cash 9,000
Restructured Debt 300,000
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
Accounts Payable 69,000
Accounts Receivable 51,000
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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10 - 13
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
Gain on restructuring (3) 7,880
Gain on restructuring (5) 14,300
Gain on restructuring (6) 41,500
Balance 66,820
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10 - 14
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
Restructured Debt 5,200
Cash ($52,000 .10) 5,200
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10 - 15
Problem 10-3
Part A
PROST COMPANY
Statement of Affairs
December 31, 2009
Book
Value
Assets
Realizable
Value
Assets Pledged with Fully Secured Creditors:
$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
Assets Pledged with Partially Secured Creditors:
60,000 Notes Receivable * 57,500
76,000 Accounts Receivable 55,000 112,500
Notes Payable 225,000
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 -
Total Net Realizable Value 227,165
Liabilities having Priority Accrued Wages 45,000 Net Free Assets 182,165
Estimated Deficiency to Unsecured Creditors 150,335
$858,500 $332,500
* $60,000 - $2,500 = $57,500.
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10 - 16
Problem 10-3 (continued)
Book
Value
Equities
Unsecured
Liabilities Having Priority:
$ 45,000 Accrued Wages $ 45,000
Fully Secured Creditors:
350,000 Mortgage Payable 350,000
Accrued Interest 3,000
$353,000
Partially Secured Creditors:
225,000 Bank Notes Payable 225,000
Notes Receivable $57,500
Accounts Receivable 55,000 112,500 $112,500
Unsecured Creditors:
220,000 Accounts Payable 220,000
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
Estimated Losses: Estimated Gains:
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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10 - 17
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
Accounts Payable (new) 35,000
Liabilities Not Liquidated
Accounts Payable (old) 35,000
Accounts Payable (new) 5,000
Net Gain (1) 3,000
$667,000 $667,000
* ($215,000 - $14,000 - $50,000) = $151,000
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10 - 18
Problem 10-4 (continued)
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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10 - 19
Problem 10-5
Part A Trustees Books Cash 4,500
Accounts Receivable (old) 15,000
Inventory 142,650
Property and Equipment 90,600
Allowance for Uncollectibles (old) 3,750
Accumulated Depreciation 36,825
Plum Company in Receivership ($252,750 - $3,750 - $36,825) 212,175 To record the receipt of Plum Companys assets.
Cash 78,000
Accounts Receivable (new) 75,000
Sales 153,000
To record merchandise sales.
Cash 75,750
Accounts Receivable (old) 11,250
Accounts Receivable (new) 64,500
To record collection of accounts receivable.
Operating Expenses 11,850
Trustee Expenses 3,000
Cash 14,850
To record cash expenses.
Bad Debt Expense 2,250
Depreciation Expense 5,250
Allowance for Uncollectibles (new) 2,250
Accumulated Depreciation 5,250
To record adjustment for bad debts and depreciation.
Allowance for Uncollectibles (old) 3,750
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
Loss on Sale of Equipment 5,025
Property and Equipment 90,600
To record the sale of property and equipment.
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10 - 20
Problem 10-5 (continued)
Sales 153,000
Plum Company in Receivership 17,025 Inventory 142,650
Operating Expenses 11,850
Trustee Expenses 3,000
Bad Debt Expense 2,250
Depreciation Expense 5,250
Loss on Sale of Equipment 5,025
To close income statement accounts.
Plum Company Books
Allowance for Uncollectibles 3,750
Accumulated Depreciation 36,825
P. Smith, Trustee 212,175
Cash 4,500
Accounts Receivable 15,000
Inventory 142,650
Property and Equipment 90,600
To record the transfer of assets to P. Smith.
Accounts Payable 143,175
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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10 - 22
Problem 10-5 (continued)
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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10 - 23
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
Accounts Receivable (new) 10,500
Assets Acquired Less: Allowance for Uncollectibles 2,250 8,250
Accounts Receivable (new) 75,000
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
Accounts Payable 143,175
Liabilities Liquidated
Accounts Payable 143,175 Net Loss 17,025
$ 445,725 $ 445,725
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10 - 24
Problem 10-7
MINER COMPANY
Statement of Affairs
May 31, 2009
Book
Value
Assets
Realizable
Value
Assets Pledged with Fully Secured Creditors:
$ 50,000 Notes Receivable $39,800
1,200 Accrued Interest Rec. 1,000 $ 40,800
Notes Payable 40,000
Accrued Interest Pay. 800 40,800
119,000 Building 75,000
Note Payable 20,000
Accrued Interest Pay. 800 20,800 $ 54,200
Assets Pledged with Partially Secured Creditors:
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 -
Total Net Realizable Value 140,600
Liabilities having Priority Wages 6,000 Taxes 2,400 8,400
Net Free Assets 132,200
Estimated Deficiency to Unsecured Creditors 53,600
$ 320,000 $ 185,800
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10 - 25
Problem 10-7 (continued)
Book
Value
Equities
Unsecured
Liabilities Having Priority:
$ 6,000 Accrued Wages $ 6,000
2,400 Taxes Payable 2,400 $ 8,400
Fully Secured Creditors:
60,000 Notes Payable 60,000
1,600 Accrued Interest Payable 1,600 61,600
Partially Secured Creditors:
10,000 Note Payable 10,000
Equipment 4,200 $ 5,800
Unsecured Creditors:
170,000 Accounts Payable 170,000
10,000 Notes Payable 10,000
Stockholders Equity 110,000 Common Stock
( 50,000) Retained Earnings (Deficit)
$ 320,000 $ 185,800
Deficiency Account
May 31, 2009
Estimated Losses: Estimated Gains:
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%
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10 - 26
Problem 10-8
Part A
DAVIS MANUFACTURING COMPANY
Statement of Affairs
March 31, 2009
Book
Value
Assets
Realizable
Value
Assets Pledged with Fully Secured Creditors:
$ 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
Assets Pledged with Partially Secured Creditors:
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
Total Net Realizable Value 561,625
Liabilities having Priority Wages $ 33,750 Taxes 5,250 39,000
Net Free Assets 522,625
Estimated Deficiency to Unsecured Creditors 212,125
$ 1,406,375 $ 734,750
* ($75,000 + ($40,500/3)) = $88,500.
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10 - 27
Problem 10-8 (continued)
Book Value
Equities
Unsecured
Liabilities Having Priority:
$ 33,750 Wages Payable $ 33,750
5,250 Payroll Taxes Payable 5,250
Fully Secured Creditors:
51,000 Notes Payable 51,000
1,750 Accrued Interest Payable 1,750
Partially Secured Creditors:
45,000 Note Payable 45,000
1,000 Accrued Interest Payable 1,000
46,000
Notes Receivable 35,000 11,000
440,000 Mortgage Note Payable 440,000
21,250 Accrued Interest Payable 21,250
461,250
Land and Buildings 425,000 36,250
Unsecured Creditors:
587,500 Accounts Payable 587,500
100,000 Notes Payable 100,000
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
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10 - 28
Problem 10-8 (continued)
Part B
Deficiency Account
May 31, 2009
Estimated Losses: Estimated Gains:
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%
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