Chapter 21 Debt Restructuring, Corporate Reorganizations, and Liquidations MCQS

MULTIPLE CHOICE

     1.   Which of the following is an illustration of an action that can be taken to help a troubled firm without using the court system?

a.

asset transfers to settle debt

b.

equity interest granted in exchange for debt

c.

modifications of interest rates more favorable to the firm

d.

All or a combination can be used.

ANS:  D                    DIF:    E                    OBJ:   21-1

     2.   In a troubled debt restructuring where the debtor elects to transfer an equity interest to a creditor in exchange for the satisfaction of an outstanding debt:

a.

the debtor may recognize a gain on restructure when the market value of the equity interest is greater than the book value of the debt plus any accrued interest

b.

the debtor may recognize a gain on restructure when the market value of the equity interest is less than the book value of the debt plus any accrued interest

c.

any difference between market value of equity interest and book value of the debt plus accrued interest must be recorded in Retained Earnings.

d.

any difference between market value of equity interest and book value of the debt plus accrued interest must be recorded in Additional Paid in Capital in Excess of Par.

ANS:  B                    DIF:    M                   OBJ:   21-2

     3.   Equipment with a fair value of $65,000 and a cost basis of $60,000 is transferred to a creditor in partial settlement of a debt of $150,000 plus accrued interest of $7,500. The balance of the debt will be satisfied by 3 equal payments of $30,000 over the next three years. Which of the following journal entries best records the restructure?

a.

Loan Payable                                                                   150,000

Interest Payable                                                                   7,500

     Equipment                                                                                          60,000

     Restructured Debt                                                                              90,000

     Gain on Restructure                                                                             7,500

b.

Loan Payable                                                                   150,000

Loss on Restructure                                                             5,000

     Equipment                                                                                           60,000

     Gain on Transfer of Equipment                                                             5,000

     Restructured Debt                                                                               90,000

c.

Loan Payable                                                                    150,000

Interest Payable                                                                    7,500

     Equipment                                                                                          60,000

     Gain on Transfer of Equipment                                                             5,000

     Restructured Debt                                                                               90,000

     Gain on Restructure                                                                              2,500

d.

Loan Payable                                                                    150,000

Interest Payable                                                                    7,500

     Equipment                                                                                          65,000

     Restructured Debt                                                                              90,000

     Gain on Restructure                                                                             2,500

ANS:  C                    DIF:    M                   OBJ:   21-2

     4.   In a quasi-reorganization, which of the following may occur?

a.

Excess plant capacity may be sold

b.

Assets may be revalued to reflect impaired values

c.

Retained Earnings deficits are eliminated by changes made to the capital structure

d.

All of the above may occur

ANS:  D                    DIF:    E                    OBJ:   21-2

     5.   In a quasi-reorganization, a debit balance in Retained Earnings (a deficit) is eliminated by

a.

reducing paid-in capital or reorganization capital.

b.

reducing future depreciation charges.

c.

issuing more capital stock.

d.

writing down assets to lower, but fair, values.

ANS:  A                    DIF:    E                    OBJ:   21-2

     6.   Which of the following is NOT a general objective of bankruptcy procedures?

a.

assurance that all obligations of the debtor will be satisfied completely

b.

attempt to give the debtor a fresh start

c.

assurance of an equitable distribution of the debtor's property among creditors

d.

None of the above is a general objective.

ANS:  A                    DIF:    E                    OBJ:   21-3