Answered: A company is insolvent when Select…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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1. A company is insolvent when

Select one:

a.it is in default on one-third or more of its outstanding debt obligations.

b.it is unable to pay debts within 90 days following the close of the company's reporting year, whether such year is a calendar or fiscal year.

c.it is unable to pay debts as the obligations come due.

d.it is more likely than not that it will not be able to pay debts within a reasonable period of time following the date such obligations become due.

e.it is unable to timely remit payments on more than two-thirds of its outstanding obligations measured on a rolling three-month basis.

2.The statement of financial affairs is prepared

Select one:

a.in order to bring clarity to the "liquidate or reorganize" decision.

b.under the assumption that liquidation will occur.

c.Under the going concern assumption.

d.as the final statement produced in any liquidation or reorganization scenario.

e.Both a) and b) are correct.

3. A Chapter 7 bankruptcy is a(n)

Select one:

a.voluntary reorganization.

b.bankruptcy forced by a company's creditors.

c.bankruptcy in which all creditors receive payment in full.

d.involuntary reorganization.

e.liquidation.

4. Which one of the following unsecured liabilities has the highest priority when an insolvent company is about to be liquidated?

Select one:

a.Federal income taxes payable

b.Loans made to the company by its stockholders

c.Employees' claims for salaries

d.Claims for expenses of administering the bankruptcy

e.Bank loans

6.On a statement of financial affairs, a company's liabilities should be valued at

Select one:

a.the present value of future cash flows.

b.the amount expected to be paid if the company could honor its debts.

c.net realizable value.

d.the amount required for settlement.

e.replacement cost.

7.On its balance sheet, a company undergoing reorganization should

Select one:

a.report its assets at current replacement cost.

b.report its assets at net realizable value because there is reason to doubt that the organization is a going concern.

c.report its assets at fair value, so that financial statement users can estimate whether creditors' claims will be met.

d.continue to report its assets at book value.

e.report its assets as pledged or free.

8. How should the fresh start reorganization value normally be determined?

Select one:

a.As the net realizable value of identifiable assets, debt, and equity, only including assets that were in the previous balance sheet.

b.As the sum of current replacement cost of the company's assets.

c.As the fair value of assets, debt, and equity, including assets that were not in the previous balance sheet.

d.As adjusted current cash flows for the entity as it emerges from reorganization.

e.As the sum of the historical book values of net assets, adjusted for assets not previously recorded.

9. Marter Co. filed a bankruptcy petition and liquidated its noncash assets. Marter was paying forty cents on the dollar for unsecured claims. Keenan Co. held a mortgage of $150,000 on Marter's land which was sold for $110,000. The total amount of payment that Keenan should have received is calculated to be

Select one:

a.$150,000.

b.$126,000.

c.$44,000.

d.$60,000.

e.$110,000.

10. Under what circumstances does an estate have an executor?

Select one:

a.When the estate exceeds the dollar amount of the estate tax exemption.

b.When the will establishes a trust fund.

c.When there is no valid will.

d.When the will is contested.

e.When the will names a specific person to administer the estate.

11. What is meant by "an individual dies intestate?"

Select one:

a.That person did create a will before death, but the will neglected to name an executor.

b.That person's estate is insufficient to pay all claims against it.

c.That person was not certified to be of sound mind before writing their will.

d.That person did not create a legal will prior to death.

e.That person's estate will automatically pass to the state, and the presumed heirs will get nothing.

12. What is the process of abatement?

Select one:

a.The establishment of how the creditors will be paid.

b.Payment of the claims of creditors.

c.An attempt to determine the deceased's intentions when the terms of the will are unclear.

d.Selling of assets included in an estate to be able to pay creditors.

e.A reduction of various bequests when the estate is not adequate to satisfy them completely.

13. What guidelines must be followed to classify a transaction as associated with the principal of an estate or as an income transaction?

Select one:

a.The decedent's intentions or state laws

b.Generally accepted accounting principles

c.The Internal Revenue Code

d.State estate laws

e.Federal estate laws

14. In an executor's accounting for an estate, debts and other obligations are recorded

Select one:

a.as soon as discovered.

b.only if they are past due.

c.on the date of payment.

d.at book value.

e.as a reduction of income.

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