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Chapter 17 (10 edition) and Chapter 18 (12

edition)
CORPORATE LIQUIDATIONS, REORGANIZATIONS, AND DEBT
RESTRUCTURINGS FOR FINANCIALLY DISTRESSED CORPORATIONS

Multiple Choice Questions

LO1
1. When the bankruptcy court grants an order for relief

a. creditors may not seek payment for their claims directly


from the debtor corporation.
b. the reorganization plan was accepted by creditors having at
least one-half of the total number of claims and the claims
represent at least two-thirds of the total amount owed.
c. the bankruptcy court confirms that the reorganization plan
is fair and equitable to creditors.
d. the court discharges the debtor except for those claims
provided for in the reorganization plan.

LO1
2. Which of the following must approve a Chapter 11 plan?

a. The organization’s management.


b. The assigned trustee.
c. The entity’s stockholders.
d. The court and the creditors.

LO1
3. When the accounting equation of a corporation computes a negative
ownership position, because liabilities are greater than assets,
the firm is

a. a distressed corporation.
b. a bankrupt corporation.
c. insolvent in the equity sense.
d. insolvent in the bankruptcy sense.
LO1
4. A bankruptcy petition filed by a firm’s creditors is

a. a Chapter 7 petition.
b. a petition for liquidation.
c. an involuntary petition.
d. a voluntary petition.
LO1
5. The duties of a debtor in possession in a Chapter 11 bankruptcy
case do not include

a. filing a list of creditors and schedules of assets and


liabilities with the bankruptcy court.
b. operating the business during the reorganization period.
c. filing a reorganization plan.
d. surrendering all property to the trustee.

LO1
6. Liabilities incurred after entering Chapter 11

a. can only occur after secured creditors are paid.


b. must be approved by creditors’ committees in liquidation
cases.
c. must be approved by trustees.
d. must be preapproved by the bankruptcy court.

LO1
7. In a troubled debt restructuring involving a modification of
terms, the debtor’s gain on restructuring

a. will equal the creditor’s gain on restructuring.


b. will equal the creditor’s loss on restructuring.
c. may or may not equal the creditor’s gain on restructuring.
d. may or may not equal the creditor’s loss on restructuring.

LO1
8. A single creditor

a. can never file a petition for bankruptcy.


b. with a $10,000 or more secured claim may file a petition for
bankruptcy.
c. with a $10,000 or more unsecured claim may file a petition
for bankruptcy, if there are fewer than 12 unsecured
creditors.
d. with a $10,000 or more unsecured claim may file a petition
for bankruptcy if there are more than 12 unsecured creditors.

LO1
9. A case against a corporate debtor

a. can be filed only under Chapter 7.


b. can be filed only under Chapter 11.
c. * can be filed either under Chapter 7 or Chapter 11.
d. will be determined by the trustee whether is shall be
Chapter 7 or Chapter 11.

LO1
10. A primary difference between voluntary and involuntary bankruptcy
petitions is that

a. creditors file the petition in an involuntary filing.


b. trustees are not used in an voluntary filing.
c. voluntary petitions are not subject to review by the
bankruptcy court.
d. the debtor corporation files the petition in an involuntary
filing.

LO1
11. Creditor committees are elected

a. in all bankruptcy cases.


b. in Chapter 7 cases.
c. only in bankruptcy cases arising from involuntary petitions.
d. in Chapter 11 cases.

LO2
12. The first-to-last ranking order of priority of the following:

I.stockholder claims
II.unsecured priority claims
III.secured claims
II.unsecured nonpriority claims

in a Chapter 7 bankruptcy case is

a. I,II,IV, and III.


b. III,II,IV and I.
c. III,I,IV, and II.
d. II,IV,III,and I.

LO2
13. In typical trustee accounting

a. gains and losses on the sale of assets are charged to the


estate equity account.
b. unrecorded liabilities discovered by the trustee are
credited to the estate equity account and credited to the
liability account.
c. liquidation expenses are charged to the estate equity
account.
d. all of the above procedures are typical for trustee
accounting.

LO2
14. Trustees in a bankruptcy cases have the duty to
a. nullify affiliate transactions.
b. relegate tax payments to an unsecured status.
c. call creditor meetings on liquidation proceedings.
d. provide payments to creditors and customers.

LO3
15. If a debtor has material gains on its debt restructurings, these
gains will be reported as

a. operating gains of the debtor.


b. other non-operating gains of the debtor.
c. extraordinary gains of the debtor.
d. discontinued operations.

LO3
16. A creditor will record assets transferred in full settlement of
a note receivable at the

a. lower of cost or market value of the note receivable.


b. book value of the transferred assets.
c. fair market value of the note receivable.
d. fair market value of the transferred assets.

LO3
17. A judge would permit a debtor-in-possession in a

a. case with only secured creditors.


b. Chapter 7 case.
c. Chapter 11 case.
d. voluntary case.

LO4
18. Under the AICPA’s SOP 90-7, a reorganized company must meet a
“reorganization value test” as one of the two conditions
necessary for fresh start accounting. Reorganization value
approximates the

a. fair value of the entity’s total assets.


b. fair value of the entity’s net assets.
c. book value of the entity’s net assets.
d. None of the above choices are correct.

LO4
19. Under the AICPA’s SOP 90-7, “prepetition liabilities subject to
compromise” are liabilities incurred before the Chapter 11 filing
and are classified as
a. residual claims.
b. contingent claims.
c. current operating claims.
d. unsecured and undersecured claims.

LO4
20. Which of the following statements is correct concerning companies
emerging from reorganization under Chapter 11 when they do not
qualify for fresh start accounting?

a. The forgiveness of debt is reported as an operating gain.


b. Quasi-reorganization accounting is used.
c. The forgiveness of debt is reported as an extraordinary item.
d. The forgiveness of debt is reported as an increase in
contributed capital.

SOLUTIONS

Multiple Choice Questions


1. a

2. d

3. d

4. c

5. d

6. d

7. d

8. c

9. c

10. a

11. b
12. b

13. d

14. d

15. c

16. d

17. b

18. a

19. d

20. c

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