Chapter 10 strayer acc 401

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. Format Formation ion of a credit creditor’ or’ss commit committee tee.. The debtor debtor compan company y and its creditor creditorss agree agree to form form a 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. 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 voluntary petition, petition, the debtor files a petition petition with a bankruptcy bankruptcy court for liquidatio liquidation n under  Chapter Chapter 7 or for reorganiza reorganization tion under Chapter Chapter 11. The bankruptcy bankruptcy judge may refuse refuse a voluntary voluntary  petition if refusal is considered to be in the best interest of the creditors. In an involu involunta ntary ry petiti petition, on, credit creditors ors initi initiate ate the action action by filing filing a petiti petition on for liqui liquidat dation ion 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 value of any liens on the property property of the debtor. debtor. If there there are fewer fewer than twelve twelve credit creditors ors,, 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 debtor’s 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. claims. Those claims with liens liens against specific assets assets whose realizable value is less than the amount of the claim. Unsecured Unsecured claims. claims. Those claims claims that are not secured by liens liens against specifi specificc assets and are, therefore, therefore, paid from whatever whatever total money remains remains after secured creditors creditors are satisfied. satisfied. Some unsecured claims take priority over others under federal ban kruptcy law.

10 - 1

4. The five categories of unsecured claims claims with priority priority are: a. Administrative expenses, fees, and charges incurred in administering administering the bankrupt’s estate.  b. Unsecured Unsecured claims for wages, wages, salaries, salaries, or commissions commissions earned by an employee employee within 90 days  before the date of filing a petition in bankruptcy, limited to the extent of $4,650 $ 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 p etition 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 Claims of of govern governmen mental tal unit unitss for unpa unpaid id taxes taxes.. 5. Dividends represent the final distribution made to general unsecured creditors. a. Transfer of Assets: The transfer transfer of assets by a debtor to a creditor generally generally produces 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 transfer transferred. red. This gain is reported reported as a component of operating operating income. In addition, a gain or loss on transfer of assets is recognized for the difference difference between the fair value value and book value value of the assets assets transfe transferre rred. d. This This gain (loss) (loss) is report reported ed 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 equ ity 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 payments specified specified by the new terms are less than than the carrying 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 st statement of of aff affairs is an an acc accounti nting rep report tha that is des designed to per permit int interested  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  potential net deficiency that would result if the assets were realized and claims liquidated. The officer is incorrect. incorrect. Some claims, such as for taxes, fines, and penalties are not discharged.

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The primary duties of a trustee are: a. To be acco account untabl ablee of all all proper property ty rece receive ived. d.  b. To examine examine proofs of of claims claims and object object to the allowanc allowancee of any claim claim that is is improper. improper. c. To furnish furnish such informatio information n concerning concerning the estate and the estate’s estate’s administ administratio ration n as is requested requested  by a party in interest. d. If the busine business ss of the the debt debtor or is auth author oriz ized ed to be opera operate ted, d, file file with with the court court and and with 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 debtor’s financial affairs. f. If applicable, applicable, file file a plan of reorgani reorganization zation,, and, if the plan plan is accepted, accepted, file file such reports reports as are are required by the court. 10. 10. The pur purpo pose se of of a com combi bini ning ng wor workp kpap aper er is is to ser serve ve as as a mean meanss by whi which the the tr trust ustee’ ee’s accounts are united with the debtor company’s accounts in order to prepare appropriate financial statements. 11. 11. Thee purpos Th purposee of a real realiz izat atio ion n and liqui liquidat datio ion n acco account unt is to repor reportt summa summary ry real realiz izat atio ion n and distribution activities of a trustee or receiver receiver to the court. It reports the the changes that have occurred during during a period period in the monetary monetary items items because because that that is what what the court offici officials als are primar primaril ily y 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 creditors.. In contrast, Chapter 11 bankruptcy b ankruptcy allows the firm the opportunity to reorganize its debt and an d to try to re-emerge as a healthy organization. o rganization. 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.

law makes makes sweeping sweeping changes changes to Americ American an bankruptcy bankruptcy laws laws and makes makes it more 2. The new law 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 • 10 - 3

These changes provide more safety for the creditors, who should consequently be better   protected. Individuals who fail the the means test may opt instead 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 und uly 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 shift the risk balance somewhat to the shoulders of the entrepreneur from those of the investor.

d esirable or ethical option, but sometimes circumstances may 4. Filing for bankruptcy is never a desirable arise that seem to force force a business or an individual individual into this tough situation. 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 this question. The purpose of this discussion 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 student will never find himself himself or  herself in such a position, but, as the old saying goes, until you’ve walked a mile in another’s shoes…

ANSWERS TO EXERCISES Exercise 10-1

1. a 2. b 3. a

4. c 5. b

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Exercise 10-2

1. Fals Falsee

Inso Insolv lven ency cy is the the ina inabi bili lity ty to pay pay deb debts ts as they they beco become me due. due. Clas Classi sifi fica cati tion on as as to to cur curre rent nt and long-term is irrelevant.

2. True 3. True 4. Fals Falsee

Secu Secure red d cre credi dito tors rs are are pai paid d fir first st from from the the proc procee eeds ds of sale sale of spec specif ific ic asse assets ts.. If ther theree are are  proceeds remaining, unsecured creditors with priority will be paid before other  unsecured creditors.

5. True 6. Fals Falsee

A gai gain n on rest restru ruct ctur urin ing g is meas measur ured ed by the the exce excess ss of the the carr carryi ying ng val value ue of the the paya payabl blee settled over the fair value of the assets transferred.

7. Fals Falsee

Rest Restru ruct ctur urin ing g gain gainss fro from m tro troub uble led d debt debt rest restru ruct ctur urin ings gs are are rep repor orte ted d by the the deb debto torr as as a separate component of operating income.

8. Fals Falsee

The sta The state teme ment nt of of aff affai airs rs is a rep repor ortt that that show showss the the est estim imat ated ed amo amoun untt to to be be paid paid to each each class of claim in the event of liquidation.

Exercise 10-3

50,000 Part A Copyright Gain on Transfer of Assets 50,000 To revalue the copyright to its current fair value. [$95,000 – ($100,000 - $55,000)] Notes Payable Accrued Interest Payable Accumulated Amortization – Copyright Copyright ($100,000 + $50,000) Gain on Debt Restructuring

150,000 15,000 55,000 150,000 70,000

co mponent (assuming Part B The gain on transfer of assets ($50,000) should be reported as a separate component material in amount) of operating income; the gain ga in on restructuring ($70,000) should also be reported as a separate component of operating income. 15,000 Part C Loss on Transfer of Assets Copyright 15,000 To revalue the copyright to its current fair value. [$30,000 – ($100,000 - $55,000)] Notes Payable Accrued Interest Payable Accumulated Amortization – Copyright Copyright ($100,000 - $15,000) Gain on Debt Restructuring ($165,000 - $30,000) 10 - 5

150,000 15,000 55,000 85,000 135,000

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 ca rrying value plus 3 years’ interest at $49,750 per year) exceed the current carrying value of the debt, $995,000. Part B Note Payable Accrued Interest Payable Restructured Debt

900,000 95,000 995,000

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 separate component of operating income. Part B Notes Payable Accrued Interest Payable Restructured Debt Gain on Debt Restructuring

900,000 95,000 744,000 251,000

Part C Restructured Debt Cash

48,000 48,000

Exercise 10-6 Realizable Value of all Assets ($190,000 + $90,000 + $102,000) Allocated to: Fully secured creditors Partially secured creditors Unsecured creditors with priority Remainder available to general unsecured creditors

Payment rate to general unsecured creditors (Including balance due to partially secured creditors) $171,000 / ($350,000 + ($120,000 - $90,000))

$382,000

(91,000) (90,000) (30,000) $171,000

4 5%

Realizable Value of Assets: Assets pledged to fully secured creditors Assets pledged to partially secured creditors Free assets Total realizable value

$190,000 90,000 102,000 $382,000

Amounts to be paid to: Fully secured creditors Partially secured creditors [$90,000 + .45($30,000)] Unsecured creditors with priority General unsecured creditors .45($350,000) Total

$ 91,000 103,500 30,000 157,500 $382,000

10 - 6

$262,000 Exercise 10-9

Cash Accounts Receivable (old) Inventory Property and Equipment Allowance for Uncollectibles (old) Accumulated Depreciation TRX Company – in Receivership ($939,400 – $16,000 - $211,500) To record the receipt of TRX Company assets.

26,700 130,400 191,900 590,400

Cash Accounts Receivable (new) Sales To record cash sales and sales on account.

31,500 264,500

Cash

319,000

16,000 211,500 711,900

296,000

Accounts Receivable (old) Accounts Receivable (new)

76,800 242,200

Purchases Accounts Payable (new) To record purchases on account.

127,500

TRX Company – in Receivership Accounts Payable (new) Operating Expenses Trustee Expenses Cash To record cash payments.

206,500 61,600 46,000 13,000

127,500

327,100

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Exercise 10-9 (continued)

Bad Debt Expense Depreciation Expense Allowance for Uncollectibles (old) Allowance for Uncollectibles (new) Accumulated Depreciation To record estimated bad debts and depreciation expense.

21,600 32,400

Allowance for Uncollectibles (old) Account Receivable (old) To write off uncollectible accounts.

21,000

13,000 8,600 32,400

21,000

Sales

296,000

Inventory ($191,900 - $149,700) Purchases Operating Expenses Trustee Expenses Bad Debt Expense Depreciation Expense Income Summary To close nominal accounts and to adjust inventory. Income Summary TRX Company – in Receivership To Close income summary account.

42,200 127,500 46,000 13,000 21,600 32,400 13,300

13,300 13,300

10 - 8

Exercise 10-10 TRX COMPANY – IN RECEVERSHIP Combining Workpaper  December December 31, 2009 Trial Balance TRX Trustee Company

Adjustments and Eliminations Dr. Cr.

Combined Income Balance Statement Sheet

Debits Cash ($26,700 + $31,500 + $319,000 - $327,100) Accounts Receivable (old) Accounts Receivable (new) Inventory Property and Equipment Purchases Operating Expenses Trustee Expenses Bad Debt Expense Depreciation Expense Cost of Goods Sold ($191,900 + $127,500 - $149,700) Your Name, Trustee Total

50,100 53,600 22,300 191,900 590,400 127,500 46,000 13,000 21,600 32,400 (1) 1,148,800

(1)

42,200

(1)

127,500 46,000 13,000 21,600 32,400 169,700

169,700

505,400 505,400

50,100 53,600 22,300 149,700 590,400

(2)

505,400 282,700

866,100

Credits Allowance for Uncollectibles: (Old) (New) Accumulated Depreciation Accounts Payable: (Old) (New) Capital Stock Retained Earnings (Deficit) Sales TRX Company-in Receivership Total

29,000 8,600 243,900

29,000 8,600 243,900 101,900 65,900 800,000 (396,500)

101,900 65,900 800,000 (396,500) 296,000 505,400 1,148,800

296,000 (2) 505,400

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

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505,400 675,100

675,100

296,000 (13,300) 282,700

13,300 866,100

ANSWERS TO PROBLEMS Problem 10-1

1.

2.

Accounts Payable Cash ($71,600 × .42) Gain on Restructuring of Debt

71,600

Allowance for Uncollectible Accounts Loss on Transfer of Assets Accounts Receivable ($92,000 - $69,000)

19,450 3,550

30,072 41,528

23,000

Accounts Payable Accounts Receivable Gain on Restructuring of Debt ($132,400 - $69,000) 3.

4.

132,400 69,000 63,400

Accrued Expenses Cash

14,620 14,620

Notes Payable Accrued Interest Payable Cash Restructured Debt Gain on Restructuring of Debt ($327,000 - $309,000)

300,000 27,000 9,000 300,000 18,000

Proble Pro blem m 10-3 10- 3 Part A

PROST COMPANY Statement of Affairs December 31, 2009 Book  Value

Assets Assets Pledged with Fully Secured Creditors: $140,000 Land $200,000 400,000 Plant and Equipment 205,000 $405,000 Mortgage Payable Accrued Interest

350,000 3,000

353,000

Realizable Value

$ 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 4,000 Prepaid Expenses

2,500 4,000 10 - 10

Inventories: 43,000 Finished Goods (1) 60,000 Work in Process (2) 51,000 Raw Materials 12,000 Investment in Stock 10,000 Goodwill Total Net Realizable Value Liabilities having Priority – Accrued Wages Net Free Assets Estimated De Deficiency to to Un Unsecured Cr Creditors $858,500 * $60,000 - $2,500 = $57,500.

10 - 11

47,515 84,150 18,000 19,000 - 0 227,165 45,000 182,165 150,335 $332,500

Problem 10-3 (continued)

Book  Value $ 4 5 ,0 0 0

350 ,000

225 ,000

220 ,000

380 ,000 (361,500) (361,5 00) $858,500 $858, 500

Unsecure d

Equities Liabilities Having Priority: Accrued Wages

$ 45,000

Fully Secured Creditors: Mortgage Payable Accrued Interest Partially Secured Creditors: Bank Notes Payable Notes Receivable Accounts Receivable

350,000 3,000 $353,000 225,000 $57,500 55,000

112,500

Unsecured Creditors: Accounts Payable

$112,500

220,000

Stockholders’ Equity Capital Stock   Retained Retaine d Earnings Earning s $332,500 $332, 500

$43,000 × 1.3 = $55,900 × .85 = $47,515 (2) ($60,000 + $30,000) × 1.10 = $99,000 × .85 = $84,150 (1)

Deficiency Account December 31, 2009 Estimated Losses: Notes Receivable Accounts Receivable Inventory * Property and Equipment Goodwill Unrecorded Accrued Interest

Estimated Gains: $ 2,500 Land 21,000 Investment in Stock 4,335 Common Stock 195,000 Retained Earnings 10,000 Estimated Deficiency 3,000 to Unsecured Creditors $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%

10 - 12

$ 60,000 7,000 380,000 (361,500) 150,335 $235,835

Problem 10-5 Part A

Trustee’s Books Cash Accounts Receivable (old) Inventory Property and Equipment Allowance for Uncollectibles (old) Accumulated Depreciation Plum Company – in Receivership ($252,750 - $3,750 - $36,825) To record the receipt of Plum Company’s assets.

4 ,500 15 ,000 14 2 ,65 0 9 0 ,60 0 3,750 36,825 212,175

Cash Accounts Receivable (new) Sales To record merchandise sales.

7 8 ,00 0 7 5 ,0 0 0

Cash

7 5 ,75 0

153,000

Accounts Receivable (old) Accounts Receivable (new) To record collection of accounts receivable. Operating Expenses Trustee Expenses Cash To record cash expenses.

11,250 64,500

11 ,850 3 ,000 14,850

Bad Debt Expense Depreciation Expense Allowance for Uncollectibles (new) Accumulated Depreciation To record adjustment for bad debts and depreciation.

2 ,250 5 ,2 50

Allowance for Uncollectibles (old) Accounts Receivable (old) ($15,000 – $11,250) To write off uncollectible accounts.

3 ,7 5 0

Plum Company – in Receivership Cash To record payment of old accounts payable. Cash Accumulated Depreciation ($36,825 + $5,250) Loss on Sale of Equipment Property and Equipment To record the sale of property p roperty and equipment.

10 - 13

2,250 5,250

3,750

1 4 3 ,1 7 5 143,175

4 3 ,50 0 42 ,07 5 5 ,025 90,600

Problem 10-5 (continued)

Sales Plum Company – in Receivership Inventory Operating Expenses Trustee Expenses Bad Debt Expense Depreciation Expense Loss on Sale of Equipment To close income statement accounts.

15 3 ,000 1 7 ,0 2 5 142,650 11,850 3,000 2,250 5,250 5,025

Plum Company Books Allowance for Uncollectibles Accumulated Depreciation P. Smith, Trustee Cash Accounts Receivable Inventory Property and Equipment To record the transfer of assets to P. Smith. Accounts Payable P. Smith, Trustee To record the payment of accounts accou nts payable by P. Smith. Retained Earnings P. Smith, Trustee To record operating effects reported by P. Smith.

10 - 14

3 ,750 36 ,825 212 ,175 4,500 15,000 142,650 90,600

1 4 3 ,1 7 5 143,175

17,025 17,025

Problem 10-5 (continued) Part B

PLUM COMPANY – IN RECEVERSHIP Combining Workpaper  For Five Months Ending October 31, 2009 Trial Balance PLUM Trustee Company

Adjustments and Eliminations Dr. Cr.

Combined Income Balance Statement Sheet

Debits Cash * Accounts Receivable (new) Inventory Operating Expenses Trustee Expense Bad Debt Expense Depreciation Expense Cost of Goods Sold Loss on Sale of Equipment P Smith, Trustee Total Debits

43,725 10,500 142,650 11,850 3,000 2,250 5,250

43,725 10,500 (1)

(1)

14 142,650 11,850 3,000 2,250 5,250 142,650 5,025

142,650

5,025 69,000 $ 224,250 $ 69,000

(2)

69,000 $ 1 70 ,0 2 5

$ 54,225

Credits Allowance for Uncollectibles: (New) Capital Stock Retained Earnings (Deficit) Sales Plum Company-in Receivership Total Credits Net Loss

2,250

2,250 135,000 (66,000)

135,000 (66,000) 153,000 69,000 (2) 69,000 $ 224,250 $ 69,000 $211,650

* $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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1 53 ,0 0 0 $211,650 153,000 1 7 ,0 2 5 $ 1 7 0 ,0 25

(17,025) $ 54,225

Problem 10-6

PLUM COMPANY P. Smith, Trustee Realization and Liquidation Account June 1, 2009 to October 31, 2009 Assets to be Realized Accounts Receivable (old) Less: Allowance for Uncollectibles Inventory Plant and Equipment Less: Accumulated Depreciation

$15,000 3,750 90,600 36,825

Assets Acquired Accounts Receivable (new) Supplementary Charges Operating Expenses Trustee Expense Loss on Sale of Equipment *

Assets Realized Accounts Receivable (old) $ 11 11,250 Accounts Receivable (new) 142,650 Property and Equipment Less: Accumulated Depreciation 53,775 Assets Not Realized Accounts Receivable (new) Less: Allowance for Uncollectibles 75,000 Supplementary Credits 11,850 Sa Sales 3,000 5,025 Liabilities to be Liquidated Accounts Payable

Liabilities Liquidated Accounts Payable

143,175 Net Loss $ 445,725

Cash 4,500 Operating Expenses 78,000 Tr T rustee Expense 75,750 Accounts Payable 43,500 43,725

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$ 9 0 ,60 0 4 2 ,0 7 5

48,525

1 0 ,5 00 2 ,2 5 0

8,250

153,000

143,175 17,025 $ 445,725

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

Opening Amount Sales Accounts Receivable Sale of Land and Equipment Balance 10/31

$ 11,250 64,500

11,850 3,000 143,175

Problem 10-7

MINER COMPANY Statement of Affairs May 31, 2009 Book  Value

Assets Assets Pledged with Fully Secured Creditors: $ 50,000 Notes Receivable $39,800 1,200 Accrued Interest Rec. 1,000 $ 40 40,800 Notes Payable Accrued Interest Pay. 119,000

Building Note Payable Accrued Interest Pay.

40,000 8 00

Realizable Value

40,800 75,000

20,000 8 00

20,800

$ 5 4 ,2 0 0

Assets Pledged with Partially Secured Creditors: 13,200 Equipment 4,200 Note Payable 10,000

6,000 61,000 60,000 1,100 8,500

Free Assets Cash Accounts Receivable Inventory Prepaid Insurance Goodwill Total Net Realizable Value Liabilities having Priority – Wages Taxes Net Free Assets

6 ,0 0 0 5 0 ,00 0 3 0 ,0 0 0 4 00 - 0 140 ,600 6,000 2,400

Estimated Deficiency to Unsecured Creditors $ 320,000

10 - 17

8 ,4 0 0 132 ,200 53 ,600 $ 185 ,800

Proble Pro blem m 10 -7 (cont (c ontinu inued) ed)

Book  Value

Equities Liabilities Having Priority: $ 6,000 Accrued Wages 2,400 Taxes Payable Fully Secured Creditors: 60,000 Notes Payable 1,600 Accrued Interest Payable Partially Secured Creditors: 10,000 Note Payable Equipment

Unsecure d $ 6 ,000 2 ,400

$ 8 ,4 0 0

6 0 ,00 0 1 ,6 0 0

6 1 ,60 0

1 0 ,000 4 ,2 0 0

Unsecured Creditors: 170,000 Accounts Payable 10,000 Notes Payable

5,800

170,000 10,000

Stockholders’ Equity 110,000 Common Stock  ( 50,0 50,000 00)) Reta Retain ined ed Earn Earnin ings gs (Def (Defic icit it)) $ 320,000

Estimated Losses: Accounts Receivable Notes Receivable Inventory Buildings Equipment Prepaid Insurance Goodwill

$

Deficiency Account May 31, 2009 Estimated Gains: $ 11,000 Common Stock 10,400 Retained Earnings 30,000 Estimated Deficiency to 44,000 Unsecured Creditors 9,000 700 8,500 $113,600

$ 185,800

$ 110,000 (50,000) 53,600

$ 113,600

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

10 - 18

Problem 10-8 Part A

DAVIS MANUFACTURING COMPANY Statement of Affairs March 31, 2009 Book  Value

Assets Assets Pledged with Fully Secured Creditors: $ 11 1 15,500 Accounts Receivable * $ 88,500 Notes Payable 10,000 66,250 Investment in Stock 100,000 Note Payable $41,000 Accrued Interest Pay. 1,750 42,750

Realizable Value

$ 78 ,500

5 7 ,2 5 0

Assets Pledged with Partially Secured Creditors: 50,000 Note Receivable 35,000 Note Payable 45,000 Accrued Interest Payable 1,000 46,000 105,000 495,000

22,500 10,000 1,375 140,000 97,500 60,000 7,750 3,000 232,500

Land Buildings Mortgage No Note Pa Payable Accrued Interest Pay.

165,000 260,000 440,000 21,250

425,000 461,250

Free Assets Cash Note Receivable Accrued Interest on Notes Receivable Finished Goods Inventory (1) Work-in-Process Inventory (2) Raw Materials Inventory (3) Supplies Inventory Prepaid Expenses Equipment Total Net Realizable Value Liabilities having Priority – Wages $ 33,750 Taxes 5,250 Net Free Assets Estimated De Deficiency to to Un Unsecured Cr Creditors

$ 1,406,375 * ($75,000 + ($40,500/3)) = $88,500.

10 - 19

2 2 ,0 0 0 1 0 ,0 0 0 1 ,3 7 5 1 5 1 ,2 0 0 13 0 ,00 0 1 0 ,0 0 0 1 ,30 0 - 0 100 ,000 561 ,625 3 9 ,00 0 522 ,625 21 2 ,125 $ 7 3 4 ,7 5 0

Problem 10-8 (continued)

Book Value $

33,750 5,250

Equities Liabilities Having Priority: Wages Payable Payroll Taxes Payable

Unsecured $ 33,750 5,250

51,000 1,750

Fully Secured Creditors: Notes Payable Accrued Interest Payable

51,000 1,750

45,000 1,000

Partially Secured Creditors: Note Payable Accrued Interest Payable

45,000 1,000 46,000 35,000

11,000

440,000 21,250 461,250 425,000

36,250

Notes Receivable 440,000 21,250

Mortgage Note Payable Accrued Interest Payable Land and Buildings

587,500 100,000

469,000 (349,125) (349,125) $1,40 1, 406, 6,37 375 5

Unsecured Creditors: Accounts Payable Notes Payable

587,500 100,000

Stockholders’ Equity Common stock   Retained Retaine d Earnings Earnin gs (Deficit) $ 734, 73 4,75 750 0

(1) $140,000 × 1.20 = $168,000 - $16,800 = $151,200 (2) Estimated Selling Price Less: Estimated Completion Costs Other  than Raw Materials Realizable Value

$145,000 15,000 $130,000

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

10 - 20

Problem 10-8 (continued) Part B

Estimated Losses: Cash Accounts Receivable Notes Receivable Inventory * Buildings Prepaid Expenses Equipment

Deficiency Account May 31, 2009 Estimated Gains: $ 500 Land 27,000 Investment in Stock 15,000 Common Stock 12,750 Retained Earnings 235,000 Estimated Deficiency to 3,000 Unsecured Creditors 132,500 $425,750

60,000 33,750 469,000 (349,125) 212,125 $ 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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