Chapter 10 strayer acc 401

CHAPTER 10ANSWERS 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 creditor’s committee. The debtor company and its creditors agree to 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 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 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. Those claims with liens against specific assets whose realizable value is less than the amount of the claim.

Unsecured claims. Those claims that are not secured by liens against specific assets and are, therefore, paid from whatever total money remains after secured creditors are satisfied. Some unsecured claims take priority over others under federal bankruptcy law.

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4. The five categories of unsecured claims with priority are:a. Administrative expenses, fees, and charges incurred in administering the bankrupt’s 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 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.

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

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9. The primary duties of a trustee are:a. To be accountable of all property received.b. To examine proofs of claims and object to the allowance of any claim that is improper.c. To furnish such information concerning the estate and the estate’s 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 debtor’s 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 trustee’s accounts are united with the debtor company’s accounts in order to prepare appropriate financial statements.

11. The purpose of a realization and liquidation account is to report summary realization and distribution activities of a trustee or receiver to the court. It reports the changes that have occurred during a period in the monetary items because that is what the court officials are primarily interested in.

BUSINESS ETHICS SOLUTIONS

1. In chapter 7 bankruptcy liquidation, firms are assumed to be past the stage of reorganization and must sell off any un-exempt assets to pay creditors. In contrast, Chapter 11 bankruptcy allows the firm the opportunity to reorganize its debt and to try to re-emerge as a healthy organization. In both cases, the creditors and other claim-holders suffer losses as they will be most likely getting less return on investment than expected at the time of the initial decision to invest in the company. From an ethical perspective, a chapter 11 bankruptcy provides the creditors and other claim-holders a better chance of recovering higher value for their investments than under chapter 7 as the firm strives to recover and reorganize under chapter 11 but not under chapter 7.

2. The new law makes sweeping changes to American bankruptcy laws and makes it more difficult for individuals to file bankruptcy under chapter 7. The new law requires a means test to determine whether the borrowers have enough resources to pay for their debts. For additional information, see the following link:http://en.wikipedia.org/wiki/Bankruptcy_Abuse_Prevention_and_Consumer_Protection_Act]

In addition the new law laid down the following requirements Mandatory credit counseling and debtor education Additional filing requirements and fees Increased attorney liability and costs Fewer automatic protections for filers Increased compliance requirements for small businesses Increased amount of debt repayment under Chapter 13 Increased length of time between discharges

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These changes provide more safety for the creditors, who should consequently be better protected. Individuals who fail the means test may opt instead for Chapter 13, which involves a repayment of their debt over time.

3. Applying this test to businesses would benefit the creditors and other claim-holders, as they would feel a slight buffer to their risk, which might stimulate new business as a result of easier fund raising. It may also prevent businesses from venturing into unduly risky areas as they would not be able to bail out as easily by filing under chapter 7 if things went wrong (hence becoming somewhat more risk averse). It would seem to shift the risk balance somewhat to the shoulders of the entrepreneur from those of the investor.

4. Filing for bankruptcy is never a desirable or ethical option, but sometimes circumstances may arise that seem to force a business or an individual into this tough situation. Whether the individual finds another way at such a time or not is a personal issue and an ethical dilemma, and there is not necessarily a correct answer to this question. The purpose of this discussion is to get the student to thinking about his or her personal position, and where his ethical stance would be before the situation arises. Ideally, of course, the student will never find himself or herself in such a position, but, as the old saying goes, until you’ve walked a mile in another’s shoes…

ANSWERS TO EXERCISES

Exercise 10-1

1. a 4. c2. b 5. b3. a

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Exercise 10-2

1. False Insolvency is the inability to pay debts as they become due. Classification as to current and long-term is irrelevant.

2. True

3. True

4. False Secured creditors are paid first from the proceeds of sale of specific assets. If there are proceeds remaining, unsecured creditors with priority will be paid before other unsecured creditors.

5. True

6. False A gain on restructuring is measured by the excess of the carrying value of the payable settled over the fair value of the assets transferred.

7. False Restructuring gains from troubled debt restructurings are reported by the debtor as a separate component of operating income.

8. False The statement of affairs is a report that shows the estimated amount to be paid to each class of claim in the event of liquidation.

Exercise 10-3

Part A Copyright 50,000 Gain on Transfer of Assets 50,000

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

Notes Payable 150,000Accrued Interest Payable 15,000Accumulated Amortization – Copyright 55,000

Copyright ($100,000 + $50,000) 150,000Gain 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 150,000Accrued Interest Payable 15,000Accumulated Amortization – Copyright 55,000

Copyright ($100,000 - $15,000) 85,000Gain on Debt Restructuring ($165,000 - $30,000) 135,000

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Exercise 10-4

Part A No gain should be recognized because the total future cash payments specified by the new terms of $1,144,250 ($995,000 carrying value plus 3 years’ interest at $49,750 per year) exceed the current carrying value of the debt, $995,000.

Part B Note Payable 900,000 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 744,000Gain on Debt Restructuring 251,000

Part C Restructured Debt 48,000 Cash 48,000

Exercise 10-6Realizable 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 $190,000Assets pledged to partially secured creditors 90,000Free assets 102,000

Total realizable value $382,000

Amounts to be paid to:Fully secured creditors $ 91,000Partially secured creditors [$90,000 + .45($30,000)] 103,500Unsecured creditors with priority 30,000General unsecured creditors .45($350,000) 157,500

Total $382,000

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$262,000

Exercise 10-9

Cash 26,700Accounts Receivable (old) 130,400Inventory 191,900Property and Equipment 590,400

Allowance for Uncollectibles (old) 16,000Accumulated Depreciation 211,500TRX Company – in Receivership ($939,400 – $16,000 - $211,500) 711,900

To record the receipt of TRX Company assets.

Cash 31,500Accounts Receivable (new) 264,500

Sales 296,000To record cash sales and sales on account.

Cash 319,000Accounts Receivable (old) 76,800Accounts Receivable (new) 242,200

Purchases 127,500Accounts Payable (new) 127,500

To record purchases on account.

TRX Company – in Receivership 206,500Accounts Payable (new) 61,600Operating Expenses 46,000Trustee Expenses 13,000

Cash 327,100To record cash payments.

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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) 21,000Account Receivable (old) 21,000

To write off uncollectible accounts.

Sales 296,000 Inventory ($191,900 - $149,700) 42,200 Purchases 127,500Operating Expenses 46,000Trustee Expenses 13,000Bad Debt Expense 21,600Depreciation Expense 32,400Income Summary 13,300

To close nominal accounts and to adjust inventory.

Income Summary 13,300TRX Company – in Receivership 13,300

To Close income summary account.

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Exercise 10-10TRX COMPANY – IN RECEVERSHIP

Combining WorkpaperDecember 31, 2009

Trial Balance Adjustments and CombinedTRX Eliminations Income Balance

Trustee Company   Dr.   Cr. Statement SheetDebits

Cash ($26,700 + $31,500 + $319,000 - $327,100) 50,100 50,100Accounts Receivable (old) 53,600 53,600Accounts Receivable (new) 22,300 22,300Inventory 191,900 (1) 42,200 149,700Property and Equipment 590,400 590,400Purchases 127,500 (1) 127,500Operating Expenses 46,000 46,000Trustee Expenses 13,000 13,000Bad Debt Expense 21,600 21,600Depreciation Expense 32,400 32,400Cost of Goods Sold ($191,900 + $127,500 - $149,700) (1) 169,700 169,700Your Name, Trustee 505,400 (2) 505,400 Total 1,148,800 505,400 282,700 866,100

CreditsAllowance for Uncollectibles: (Old) 29,000 29,000 (New) 8,600 8,600Accumulated Depreciation 243,900 243,900Accounts Payable: (Old) 101,900 101,900 (New) 65,900 65,900Capital Stock 800,000 800,000Retained Earnings (Deficit) (396,500) (396,500)Sales 296,000 296,000TRX Company-in Receivership 505,400 (2) 505,400 Total 1,148,800 505,400 675,100 675,100 296,000

(13,300) 13,300Net Income 282,700 866,100

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

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ANSWERS TO PROBLEMS

Problem 10-1

1. Accounts Payable 71,600 Cash ($71,600 .42) 30,072 Gain on Restructuring of Debt 41,528

2. Allowance for Uncollectible Accounts 19,450Loss on Transfer of Assets 3,550

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

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

3. Accrued Expenses 14,620Cash 14,620

4. Notes Payable 300,000Accrued Interest Payable 27,000

Cash 9,000Restructured Debt 300,000Gain on Restructuring of Debt ($327,000 - $309,000) 18,000

Problem 10-3

Part APROST COMPANYStatement of AffairsDecember 31, 2009

Book Value Assets

RealizableValue

Assets Pledged with Fully Secured Creditors:$140,000 Land $200,000400,000 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 * 57,50076,000 Accounts Receivable 55,000 112,500

Notes Payable 225,000

Free Assets2,500 Cash 2,5004,000 Prepaid Expenses 4,000

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Inventories:43,000 Finished Goods (1) 47,51560,000 Work in Process (2) 84,15051,000 Raw Materials 18,00012,000 Investment in Stock 19,00010,000 Goodwill - 0 -

Total Net Realizable Value 227,165Liabilities having Priority – Accrued Wages 45,000Net 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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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 $57,500Accounts 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 AccountDecember 31, 2009

Estimated Losses: Estimated Gains:Notes Receivable $ 2,500 Land $ 60,000Accounts Receivable   21,000 Investment in Stock 7,000Inventory *   4,335 Common Stock 380,000Property and Equipment 195,000 Retained Earnings (361,500)Goodwill 10,000 Estimated DeficiencyUnrecorded 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 inventoryTotal amount owed unsecured creditors

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

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Problem 10-5

Part A Trustee’s BooksCash 4,500 Accounts Receivable (old) 15,000Inventory 142,650Property and Equipment 90,600

Allowance for Uncollectibles (old) 3,750Accumulated Depreciation 36,825Plum Company – in Receivership ($252,750 - $3,750 - $36,825) 212,175

To record the receipt of Plum Company’s assets.

Cash 78,000Accounts Receivable (new) 75,000

Sales 153,000To record merchandise sales.

Cash 75,750Accounts Receivable (old) 11,250Accounts Receivable (new) 64,500

To record collection of accounts receivable.

Operating Expenses 11,850Trustee Expenses 3,000

Cash 14,850To record cash expenses.

Bad Debt Expense 2,250Depreciation Expense 5,250

Allowance for Uncollectibles (new) 2,250Accumulated Depreciation 5,250

To record adjustment for bad debts and depreciation.

Allowance for Uncollectibles (old) 3,750Accounts Receivable (old) ($15,000 – $11,250) 3,750

To write off uncollectible accounts.

Plum Company – in Receivership 143,175Cash 143,175

To record payment of old accounts payable.

Cash 43,500Accumulated Depreciation ($36,825 + $5,250) 42,075Loss on Sale of Equipment 5,025

Property and Equipment 90,600To record the sale of property and equipment.

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Problem 10-5 (continued)

Sales 153,000 Plum Company – in Receivership 17,025

Inventory 142,650Operating Expenses 11,850Trustee Expenses 3,000Bad Debt Expense 2,250Depreciation Expense 5,250Loss on Sale of Equipment 5,025

To close income statement accounts.

Plum Company BooksAllowance for Uncollectibles 3,750Accumulated Depreciation 36,825P. Smith, Trustee 212,175

Cash 4,500Accounts Receivable 15,000Inventory 142,650Property 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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Problem 10-5 (continued)Part B PLUM COMPANY – IN RECEVERSHIP

Combining WorkpaperFor Five Months Ending October 31, 2009

Trial Balance Adjustments and CombinedPLUM Eliminations Income Balance

Trustee Company   Dr.   Cr. Statement SheetDebits

Cash * 43,725 43,725Accounts Receivable (new) 10,500 10,500Inventory 142,650 (1) 142,650Operating Expenses 11,850 11,850Trustee Expense 3,000 3,000Bad Debt Expense 2,250 2,250Depreciation Expense 5,250 5,250Cost of Goods Sold (1) 142,650 142,650Loss on Sale of Equipment 5,025 5,025P Smith, Trustee 69,000 (2) 69,000 Total Debits $ 224,250 $ 69,000 $ 170,025 $ 54,225

CreditsAllowance for Uncollectibles: (New) 2,250 2,250Capital Stock 135,000 135,000Retained Earnings (Deficit) (66,000) (66,000)Sales 153,000 153,000Plum Company-in Receivership 69,000 (2) 69,000 Total Credits $ 224,250 $ 69,000 $211,650 $211,650 153,000Net Loss 17,025 (17,025)

$ 170,025 $ 54,225* $4,500 + $78,000 + $75,750 - $14,850 - $143,175 + $43,500(1) To adjust inventory and set up cost of goods sold.(2) To eliminate reciprocal accounts.

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Problem 10-6PLUM COMPANY

P. Smith, TrusteeRealization and Liquidation Account

June 1, 2009 to October 31, 2009

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 143,175Liabilities Liquidated Accounts Payable 143,175 Net Loss 17,025

$ 445,725 $ 445,725* ($90,600 - $42,075) - $43,500 = $5,025

CashOpening Amount 4,500 Operating Expenses 11,850Sales 78,000 Trustee Expense 3,000Accounts Receivable 75,750 Accounts Payable 143,175Sale of Land and Equipment 43,500Balance 10/31 43,725

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Problem 10-7

MINER COMPANYStatement of Affairs

May 31, 2009Book Value Assets

RealizableValue

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 75,000Note Payable 20,000Accrued Interest Pay. 800 20,800 $ 54,200

Assets Pledged with Partially Secured Creditors:13,200 Equipment 4,200

Note Payable 10,000

Free Assets6,000 Cash 6,000

61,000 Accounts Receivable 50,00060,000 Inventory 30,0001,100 Prepaid Insurance 4008,500 Goodwill - 0 -

Total Net Realizable Value 140,600 Liabilities having Priority – Wages 6,000

Taxes 2,400 8,400Net Free Assets 132,200

Estimated Deficiency to Unsecured Creditors 53,600$ 320,000 $ 185,800

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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 60,0001,600 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 170,00010,000 Notes Payable 10,000

Stockholders’ Equity110,000 Common Stock

( 50,000) Retained Earnings (Deficit)$ 320,000 $ 185,800

Deficiency AccountMay 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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Problem 10-8

Part ADAVIS MANUFACTURING COMPANY

Statement of AffairsMarch 31, 2009

Book Value Assets

RealizableValue

Assets Pledged with Fully Secured Creditors:$ 115,500 Accounts Receivable * $ 88,500

Notes Payable 10,000 $ 78,50066,250 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 165,000495,000 Buildings 260,000 425,000

Mortgage Note Payable 440,000 Accrued Interest Pay. 21,250 461,250

Free Assets22,500 Cash 22,00010,000 Note Receivable 10,0001,375 Accrued Interest on Notes Receivable 1,375

140,000 Finished Goods Inventory (1) 151,20097,500 Work-in-Process Inventory (2) 130,00060,000 Raw Materials Inventory (3) 10,0007,750 Supplies Inventory 1,3003,000 Prepaid Expenses - 0 -

232,500 Equipment 100,000Total Net Realizable Value 561,625Liabilities having Priority – Wages $ 33,750

Taxes 5,250 39,000Net 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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Problem 10-8 (continued)

Book Value Equities

UnsecuredLiabilities Having Priority:

$ 33,750 Wages Payable $ 33,7505,250 Payroll Taxes Payable 5,250

Fully Secured Creditors:51,000 Notes Payable 51,0001,750 Accrued Interest Payable 1,750

Partially Secured Creditors:45,000 Note Payable 45,0001,000 Accrued Interest Payable 1,000

46,000 Notes Receivable 35,000 11,000

440,000 Mortgage Note Payable 440,00021,250 Accrued Interest Payable 21,250

461,250 Land and Buildings 425,000 36,250

Unsecured Creditors:587,500 Accounts Payable 587,500100,000 Notes Payable 100,000

Stockholders’ Equity469,000 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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Problem 10-8 (continued)

Part BDeficiency Account

May 31, 2009Estimated 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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