Chapter 14, Modern Advanced Accounting-Review Q & Exr
Chapter 14, Modern Advanced Accounting-Review Q & Exr
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SOLUTIONS TO EXERCISES
Ex. 14–1 1. c 10. c
2. b 11. c
3. c 12. c
4. d 13. b
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150 Modern Advanced Accounting, 10/e
5. d 14. b
6. b 15. b
7. b [$10,000 + ($40,000 x 0.50) = $30,000] 16. d
8. b 17. b
9. a
Ex. 14–2 Estimated amount of assets expected to be received by creditors of Downside Company, Dec.
18, 2006:
Fully secured liabilities (100%) $ 80,000
Unsecured liabilities with priority (100%) 60,000
Partially secured liabilities [$40,000 + ($10,000 x 0.80)] 48,000
Unsecured liabilities without priority ($90,000 x 0.80) 72,000
Total assets ($100,000 + $40,000 + $120,000) $260,000
Ex. 14–3 Computation of total estimated deficiency to unsecured, nonpriority creditors of Foldup
Company, Apr. 30, 2006:
Estimated amount available [$280,000 + ($80,000 – $60,000)] $300,000
Less: Unsecured liabilities with priority 40,000
Estimated amount available to unsecured, nonpriority creditors (72 cents on
the dollar) $260,000
Estimated deficiency to unsecured, nonpriority creditors (28 cents on the
dollar) 100,000
Unsecured, nonpriority creditors [$330,000 + ($80,000 – $50,000)] $360,000
Ex. 14–4 Expected distribution of Windup Company's assets to its creditors, Apr. 30, 2006:
To pay fully secured liabilities (100%) $ 60,000
To pay unsecured liabilities with priority (100%) 30,000
To pay partially secured liabilities [$30,000 + ($10,000 x 0.50)] 35,000
To pay unsecured liabilities without priority ($50,000 x 0.50) 25,000
Total assets ($70,000 + $30,000 + $50,000) $150,000
Ex. 14–5 Amount expected to be paid to each class of creditors of Liquo Company, Dec. 17, 2006:
Total Estimated
Class of creditor claims Computation amount
Fully secured $ 60,000 100% $ 60,000
Unsecured, priority 14,000 100% 14,000
Partially secured 120,000 $104,000 +
($16,000 x 0.65) 114,400
Unsecured, no priority 224,000 65% 145,600
Total assets ($150,000 + $104,000 +
$80,000) $334,000
Ex. 14–6 Computation of cash received by partially secured creditors of Scott Company, June 25, 2006:
Current fair value of assets pledged $60,000
Add: Proportionate recovery on $40,000 ($100,000 –
$60,000 = $40,000) unsecured portion:
Free assets, at current fair value $140,000
Addition from assets pledged for fully secured
liabilities ($190,000 – $130,000) 60,000
Total free assets $200,000
Less: Unsecured liabilities with priority 20,000
Amount available for unsecured liabilities without priority $180,000
Total unsecured liabilities without priority ($260,000 +
$40,000) $300,000
Proportionate recovery percentage ($180,000 ÷ $300,000) 0.60
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Solutions Manual, Chapter 14 151
Proportionate recovery on $40,000 ($40,000 x 0.60) 24,000
Cash received by partially secured creditors $84,000
Ex. 14–7 Computation of amount that Stark Company should receive from trustee of Wick Corporation:
Amount owed to Stark Company: Note payable plus accrued interest of $940 $23,940
Less: Current fair value of inventories pledged as collateral on note 19,200
Amount unsecured, payable at approximately $0.78 on the dollar $ 4,740
Estimated amount to be received by Stark Company: Current fair value of
inventories pledged $19,200
Balance ($4,740 x 0.78) 3,697
Total amount that Stark Company should receive $22,897
Ex. 14–8 Computation of cash available to pay Decker Company’s unsecured liabilities without priority,
Aug. 15, 2006:
Free assets, at current fair value $160,000
Addition from assets pledged for fully secured liabilities ($185,000 –
$130,000) 55,000
Subtotal $215,000
Less: Unsecured liabilities with priority 35,000
Cash available for unsecured liabilities without priority $180,000
Current fair
value, Dec. 31, Realization Loss or
2005 proceeds (gain)
Trade accounts receivable $ 7,500 $6,500 $1,000
Inventories 12,500 14,500 (2,000)
Totals $20,000 $21,000 (1,000)
Liabilities liquidated at Dec. 31, 2005, carrying amounts:
Trade accounts payable $6,000
Administrative costs paid $2,950
Liabilities assumed, accrued interest payable 50 3,000
Estate deficit, Jan. 31, 2006 ($29,200 – $10,000 – $12,050* cash) $7,150
*$21,000 – $8,950 = $12,050
Ex. 14–13 Journal entries for Kolb Company, July 27, 2006:
Common Stock, no-par 600,000
Common Stock, $5 par (50,000 x $5) 250,000
Paid-in Capital in Excess of Par 350,000
Trade Accounts Payable 70,000
Common Stock, $5 par (10,000 x $5) 50,000
Paid-in Capital in Excess of Par 20,000
Trade Accounts Payable 60,000
Cash ($60,000 x 0.80) 48,000
Gain from Discharge of Indebtedness in Bankruptcy 12,000
CASES
Case 14–1 The recognition of an intangible asset “Reorganization value in excess of amounts allocable to
identifiable assets,” sanctioned by paragraph 38 of Statement of Position 90-7, appears to be
inconsistent with the definition of assets in Statement of Financial Accounting Concepts No.
6, paragraph 25. The existence of probable future economic benefits related to the
reorganization value is questionable, given that the amount recognized for the so-called
intangible asset is a residual obtained by subtracting the current fair values assigned to
identifiable tangible and intangible assets of the reorganized enterprise from its reorganization
value. That value is defined in paragraph 9 of Statement of Position 90-7 as “fair value of the
entity before considering liabilities and approximates the amount a willing buyer would pay for
the assets of the entity immediately after the restructuring.” One would deduce that the assets
referred to in the foregoing definition are identifiable assets, not speculative ones. To treat
reorganization value essentially the same as acquired goodwill appears to violate the spirit, if
not the letter, of FASB Statement No. 142, which requires in paragraph 10 that internally
developed unidentifiable assets' costs should be recognized as expenses when incurred. To
borrow a portion of the dissent of Robert T. Sprouse to the issuance of FASB Statement No.
87, “ . . . recognition practices [for reorganization value] can be neither reconciled with the
[Financial Accounting Standards] Board’s conceptual framework nor readily understood by
financial statement users.”
Case 14–2 a. The $25,000 income tax assessment applicable to 2005 generally would be accounted for
as a prior period adjustment (correction of an error of a prior period) and debited to the
Retained Earnings ledger account. However, the general rule applicable in a reorganization
requires that, when material items that should have been adjusted in the restatement of
assets and liabilities are found to have been accounted for incorrectly, any corrections
subsequently required should be made to additional paid-in capital created in the
reorganization. Such corrections should not be considered a part of the earnings
accumulated after the reorganization. In "fresh start" accounting for a reorganization, asset
carrying amounts should be restated in conformity with estimates of current fair value.
Such restatements should include write-ups of values, when justified, as well as write-
downs. The income tax assessment applicable to 2005 has no relationship to the earnings
of the past six months; the assessment should have been estimated at the time of the
reorganization.
b. Because the disposal of the equipment took place within six months of the date of the
reorganization, the appraised value on the date of the reorganization seems to have been in
error. The gain of $48,000 should have been credited to an additional paid-in capital ledger
account, not to the Retained Earnings account.
20 06
July 24 Costs of Bankruptcy Proceedings 5 0 0 0 0
Cash with Escrow Agent 5 0 0 0 0
b. Dodge Company
Estimated Percentage of Claims to be Paid
October 31, 2006
Amount Amount Percentage
Creditor group of claim to be paid to be paid
Unsecured liabilities with priority $ 7 0 0 0 $ 7 0 0 0 1 0 0 . 0
Fully secured liabilities 5 0 4 0 0 5 0 4 0 0 1 0 0 . 0
Partially secured liabilities 2 1 0 0 0 2 0 2 5 0 * 9 6 . 4
Unsecured liabilities without priority 7 9 0 0 0 5 9 2 5 0 7 5 . 0
7 Cash 5 2 0 0 0
Land 2 0 0 0 0
Buildings 3 0 0 0 0
Estate Deficit 2 0 0 0
To record realization of land and buildings for $2,000
in excess of the current fair value on date bankruptcy
petition filed.
10 Wages Payable 1 5 0 0
FICA and Income Taxes Withheld and Accrued 8 0 0
Estimated Administrative costs 6 0 0
Inventories 4 0 0
Cash 3 3 0 0
To record payment of unsecured liabilities with priority
and costs to complete inventories.
Current Fair
Value, Jan. 2, Realization Loss or
2007 Proceeds (Gain)
Land and buildings $50,000 $52,000 $ ( 2 0 0 0 )
Trade accounts
receivable 17,500 17,500
Inventories 19,350* 18,000 1 3 5 0
Public Service
Company bonds 900 920 ( 2 0 )
Totals $87,750 $88,420 ( 6 7 0 )
Liabilities liquidated:
Wages payable $ 1 5 0 0
FICA and income taxes withheld and accrued 8 0 0
Estimated administrative costs 1 8 5 0
Mortgage note payable (including accrued
interest of $550) 4 2 5 5 0 5 0
Notes payable—banks 1 7 5 0 0
Notes payable—suppliers 1 0 0 0 0
Trade accounts payable 1 3 0 0 0
Total $ 8 7 2 0 0
Interest Receivable 2 0 0
Retained Earnings 2 0 0
To accrue interest on U.S. government bonds.
Retained Earnings 2 4 0 0
Interest Payable 2 4 0 0
To accrue interest on mortgage note payable.
Retained Earnings 5 0 0 0 0
Estimated Liability under Pending Litigation 5 0 0 0 0
To record loss contingency that is probable.
Retained Earnings 5 0 0 0
Trade Accounts Payable 5 0 0 0
To record liability for fee for Apr. 30, 2006, annual
audit.
Retained Earnings 1 0 0 0
Short-term Investments ($10,000 – $9,000) 1 0 0 0
To write down short-term investments in Owens
Company common stock to fair value of $9,000 (500 x
$18 = $9,000) from cost of $10,000 ($20,000 – $10,000
= $10,000).
4 8 0 0 0 Inventories 9 5 0 0 9 5 0 0 3 8 5 0 0
1 4 0 0 0 Machinery and
equipment 6 6 0 0 6 6 0 0 7 4 0 0
1 1 5 0 0 Furniture and fixtures 1 0 5 0 0
Less: Refinishing costs ( 8 0 0 ) 9 7 0 0 1 8 0 0
9 6 0 0 Goodwill 9 6 0 0
Total estimated amount $ 8 1 9 3 0 $ 5 8 0 0 0
Less: Unsecured liabilities
with priority (contra) 6 3 3 0
Estimated amount available for
unsecured, nonpriority creditors
(0.70 on the dollar) $ 7 5 6 0 0
Estimated deficiency to
unsecured, nonpriority
creditors ($0.30 on the dollar) 3 2 4 0 0 3 0 1 0 0 Stockholders’ equity
$ 1 9 5 5 5 0 $ 1 0 8 0 0 0 $ 1 9 5 5 5 0 $ 1 0 8 0 0 0
Bilbo Corporation
Balance Sheet
April 30, 2006
Assets
Cash $ 4 1 9 7 0
Other current assets 2 6 1 1 3 0
Plant assets $1 4 4 0 4 5 0
Less: Accumulated depreciation 6 0 6 0 2 0 8 3 4 4 3 0
Total assets $1 1 3 7 5 3 0