Larsen: Modern Advanced IV. Accounting for 14.

Bankruptcy: Liquidation © The McGraw−Hill

Accounting, Tenth Edition Fiduciaries and Reorganization Companies, 2005

Chapter Fourteen

Bankruptcy:
Liquidation and
Reorganization

Scope of Chapter
Business failures are a common occurrence in the U.S. economy. Poor management, ex-
cessive debt, and inadequate accounting are the most commonly cited causes of business
failures. The situation that precedes the typical business failure is inability of a business
enterprise to pay liabilities as they become due. Unsecured creditors often resort to law-
suits to satisfy their unpaid claims against a business enterprise. Secured creditors may
force foreclosure proceedings for real property or may repossess personal property that
collateralizes a security agreement. The Internal Revenue Service may seize the assets
of a business enterprise that has failed to pay FICA and income taxes withheld from its
employees.
A business enterprise may be unable to pay its liabilities as they become due even
though the current fair values of its assets exceed its liabilities. For example, an enterprise
may experience a severe cash shortage in times of price inflation because of the lag between
the purchase or production of goods at inflated costs and the recovery of the inflated costs
through increased selling prices.
More typical of the failing business enterprise than the conditions described in the fore-
going paragraph is the state of insolvency. Insolvent is defined in the Bankruptcy Code as
follows:
“insolvent” means—
(A) with reference to an entity other than a partnership and a municipality, financial condi-
tion such that the sum of such entity’s debts is greater than all of such entity’s property, at a
fair valuation, exclusive of—
(i) property transferred, concealed, or removed with intent to hinder, delay, or defraud such
entity’s creditors; and
(ii) property that may be exempted from property of the estate under . . . this title; and
(B) with reference to a partnership, financial condition such that the sum of such partner-
ship’s debts is greater than the aggregate of, at a fair valuation—
(i) all of such partnership’s property, exclusive of property of the kind specified in subpara-
graph (A) (i) of this paragraph; and

607
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Accounting, Tenth Edition Fiduciaries and Reorganization Companies, 2005

608 Part Four Accounting for Fiduciaries

(ii) the sum of the excess of the value of each general partner’s nonpartnership property, ex-
clusive of property of the kind specified in subparagraph (A) (ii) of this paragraph, over
such partner’s nonpartnership debts;1

The terms insolvent and bankrupt often are used as interchangeable adjectives. Such
usage is technically incorrect; insolvent refers to the financial condition of a person or
business enterprise, and bankrupt refers to a legal state. In this chapter, various legal and
accounting issues associated with bankruptcy liquidations and reorganizations are dis-
cussed and illustrated.

THE BANKRUPTCY CODE

The U.S. Constitution (Article 1, Section 8) authorizes Congress to establish uniform laws
on the subject of bankruptcies throughout the United States. For the first 89 years under the
Constitution, the United States had a national bankruptcy law for a total of only 16 years.
During the periods in which national bankruptcy laws were not in effect, state laws on in-
solvency prevailed. In 1898 a Bankruptcy Act was enacted that, as amended, remained in
effect for 80 years. Enactment of the Bankruptcy Act caused state laws on insolvency to be
relatively dormant. In 1978 the Bankruptcy Reform Act established the present Bankruptcy
Code; in 1980 the Bankruptcy Tax Act established a uniform group of income tax rules for
bankruptcy and insolvency; and in 1994 the Bankruptcy Code was amended by the Bank-
ruptcy Reform Act of 1994.
The U.S. Supreme Court may prescribe by general rules the various legal practices and
procedures under the Bankruptcy Code. Thus, the Federal Rules of Bankruptcy Procedure
established by the Supreme Court constitute important interpretations of provisions of the
Bankruptcy Code.

BANKRUPTCY LIQUIDATION
The process of bankruptcy liquidation under Chapter 7 of the Bankruptcy Code involves
the realization (sale) of the assets of an individual or a business enterprise and the distrib-
ution of the cash proceeds to the creditors of the individual or enterprise. Creditors having
security interests collateralized by specific assets of the debtor generally are entitled to ob-
tain satisfaction of all or part of their claims from the assets pledged as collateral. The
Bankruptcy Code provides for priority treatment for certain unsecured creditors; their
claims are satisfied in full, if possible, from proceeds of realization of the debtor’s noncol-
lateralized assets. Unsecured creditors without priority receive cash, in proportion to the
amounts of their claims, from proceeds available from the realization of the debtor’s assets.
Thus, there are four classes of creditors in a bankruptcy liquidation: fully secured creditors,
partially secured creditors, unsecured creditors with priority, and unsecured creditors
without priority.

Debtor’s (Voluntary) Petition

The Bankruptcy Code provides that any “person,” except certain entities such as a rail-
road, an insurance company, a bank, a credit union, or a savings and loan association,

1
Bankruptcy Code, sec. 101 (32).
Larsen: Modern Advanced IV. Accounting for 14. Bankruptcy: Liquidation © The McGraw−Hill
Accounting, Tenth Edition Fiduciaries and Reorganization Companies, 2005

Chapter 14 Bankruptcy: Liquidation and Reorganization 609

may file a petition in a federal bankruptcy court for voluntary liquidation under Chapter 7
of the Code. The official form for a debtor’s bankruptcy petition, also known as a vol-
untary petition, must be accompanied by supporting exhibits of the petitioner’s debts and
property. The debts are classified as follows: (1) creditors having priority; (2) creditors
holding security; and (3) creditors having unsecured claims without priority. The debtor’s
property is reported as follows: real property, personal property, and property claimed as
exempt. Valuations of property are at market or current fair values. Also accompanying
the debtor’s bankruptcy petition is a statement of financial affairs (not to be confused
with the accounting statement of affairs illustrated on page 614 of this chapter), which
contains a series of questions concerning all aspects of the debtor’s financial condition
and operations.

Creditors’ (Involuntary) Petition

If a debtor other than a farmer, a nonprofit organization, or one of the types precluded
from filing voluntary petitions owes unpaid amounts to 12 or more unsecured creditors
who are not employees, relatives, stockholders, or other “insiders,” three or more of the
creditors having unsecured claims totaling $10,000 or more may file in a federal bank-
ruptcy court a creditors’ petition for bankruptcy, also known as an involuntary petition.
If fewer than 12 creditors are involved, one or more creditors having unsecured claims of
$10,000 or more may file the petition. The creditors’ petition for bankruptcy must claim
either (1) the debtor is not paying debts as they come due or (2) within 120 days prior to
the date of the petition, a custodian was appointed for or had taken possession of the
debtor’s property.

Unsecured Creditors with Priority

The Bankruptcy Code provides that the following unsecured debts are to be paid in full, in
the order specified if adequate cash is not available for all, out of a debtor’s estate before
any cash is paid to other unsecured creditors:
1. Administrative costs.
2. Claims arising in the course of the debtor’s business or financial affairs after the com-
mencement of a creditors’ bankruptcy proceeding but before appointment of a trustee or
order for relief.
3. Claims for wages, salaries, and commissions, including vacation, severance, and sick
leave pay not in excess of $4,000 per claimant, earned within 90 days before the date of
filing the petition for bankruptcy or cessation of the debtor’s business.
4. Claims for contributions to employee benefit plans arising within 180 days
before the date of filing the petition for bankruptcy or cessation of the debtor’s busi-
ness. The limit of such claims is $4,000 times the number of employees covered by
the plans, less the aggregate amount paid to the covered employees under priority
3 above.
5. Claims by producers of grain against a grain storage facility or by fishermen against a
fish storage or processing facility, not in excess of $4,000 per claimant.
6. Claims for cash deposited for goods or services for the personal, family, or household
use of the depositor, not in excess of $1,800 per claimant.
7. Claims for alimony, maintenance, or support of a spouse, former spouse, or child of the
debtor, under a separation agreement, divorce decree, or court order.
8. Claims of governmental entities for various taxes or duties, subject to varying time
limitations.
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610 Part Four Accounting for Fiduciaries

Property Claimed as Exempt

Certain property of a bankruptcy petitioner is not includable in the debtor’s estate. The
Bankruptcy Code excludes from coverage of the Code the various allowances provided in
the laws of either the United States or the state of the debtor’s residence, whichever is more
beneficial to the debtor. Typical of these allowances are residential property exemptions
provided by homestead laws and exemptions for life insurance policies payable on death to
the spouse or a relative of the debtor. (Bills introduced in Congress in 2001 would modify
these allowances.)

Role of Court in Liquidation

The federal bankruptcy court in which a debtor’s or creditors’ petition for bankruptcy liq-
uidation is filed oversees all aspects of the bankruptcy proceedings.
One of the first acts of the court is either to dismiss the debtor’s or creditors’ bank-
ruptcy petition or to grant an order for relief under the Bankruptcy Code. The filing
of a debtor’s petition in bankruptcy is in effect an order for relief; in a creditors’ petition,
order for relief is made by the court after a hearing at which the debtor may attempt
to refute the creditors’ allegations that the debtor was not paying debts as they came
due. Any suits that are pending against a debtor for whom a debtor’s or creditors’ bank-
ruptcy petition is filed generally are stayed until order for relief or dismissal of the
petition; after order for relief such suits are further stayed until the question of the
debtor’s discharge is determined by the court. Further, the court appoints an interim
trustee after the order for relief, to serve permanently or until a trustee is elected by
the creditors.

Role of Creditors
Within a period of 10 to 30 days after an order for relief, the bankruptcy court must call a
meeting of the creditors. At the meeting, the “outsider” creditors appoint a trustee to man-
age the debtor’s estate. A majority vote in number and amount of claims of all unsecured
and nonpriority creditors present is required for actions by creditors.

Role of Trustee
The trustee elected by the creditors or appointed by the court assumes custody of the debtor’s
nonexempt property. The principal duties of the trustee are to continue operating the debtor’s
business if directed by the court, realize the free assets of the debtor’s estate, and pay cash to
unsecured creditors. The trustee is responsible for keeping accounting records to enable the
filing of a final report with the bankruptcy court.
The Bankruptcy Code empowers the trustee to invalidate a preference, defined as the
transfer of cash or property to an “outsider” creditor for an existing debt, made while the
debtor was insolvent and within 90 days of filing of the bankruptcy petition, provided
the transfer caused the creditor to receive more cash or property than would be received in
the bankruptcy liquidation. The trustee may recover from the creditor the cash or property
constituting the preference and include it in the debtor’s estate.

Discharge of Debtor
Once the debtor’s property has been liquidated, all secured and priority creditor claims have
been paid, and all remaining cash has been paid to unsecured, nonpriority creditors, the
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Accounting, Tenth Edition Fiduciaries and Reorganization Companies, 2005

Chapter 14 Bankruptcy: Liquidation and Reorganization 611

debtor may receive a discharge, defined as the release of the debtor from all unliquidated
debts except debts such as the following:
1. Taxes payable by the debtor to the United States or to any state or subdivision, including
taxes attributable to improper preparation of tax returns by the debtor.
2. Debts resulting from the debtor’s obtaining money or property under false pretenses or
representations, or willful conversion of the property of others.
3. Debts not scheduled by the debtor in support of the bankruptcy petition, such creditors
not being informed of the bankruptcy proceedings.
4. Debts arising from embezzlement or other fraudulent acts by the debtor acting in a fidu-
ciary capacity.
5. Amounts payable for alimony, maintenance, or child support.
6. Debts for willful and malicious injuries to the persons or property of others.
7. Debts for fines, penalties, or forfeitures payable to governmental entities, other than for
tax penalties.
8. With certain exceptions, debts for educational loans made, insured, or guaranteed by
governmental entities or by nonprofit universities or colleges. (In 1997, a National Bank-
ruptcy Review Commission recommended discharge of educational loans other than for
medical schools.)
A debtor will not be discharged if any crimes, misstatements, or other malicious acts
were committed by the debtor in connection with the court proceedings. In addition, a
debtor will not be discharged if the current bankruptcy petition was filed within six years
of a previous bankruptcy discharge to the same debtor.

Role of Accountant in Bankruptcy Liquidation

The accountant’s role in liquidation proceedings is concerned with proper reporting of the
financial condition of the debtor and adequate accounting and reporting for the trustee for
the debtor’s estate, as described in the following sections.

Financial Condition of Debtor Enterprise:

The Statement of Affairs
A business enterprise that enters bankruptcy liquidation proceedings is a quitting concern,
not a going concern. Consequently, a balance sheet, which reports the financial position of
a going concern, is inappropriate for an enterprise in liquidation.
The financial statement designed for a business enterprise entering liquidation is the
statement of affairs (not to be confused with the legal bankruptcy form with a similar title
described on page 609). The purpose of the statement of affairs is to display the assets and
liabilities of the debtor enterprise from a liquidation viewpoint, because liquidation is the
outcome of the Chapter 7 bankruptcy proceedings. Thus, assets displayed in the statement
of affairs are valued at current fair values; carrying amounts of the assets are presented on
a memorandum basis. In addition, assets and liabilities in the statement of affairs are clas-
sified according to the rankings and priorities set forth in the Bankruptcy Code; the cur-
rent/noncurrent classification used in a balance sheet for a going concern is not appropriate
for the statement of affairs.

Illustration of Statement of Affairs

The balance sheet of Sanders Company on June 30, 2006, the date that Sanders filed a
debtor’s (voluntary) bankruptcy petition, is as follows:
 Larsen: Modern Advanced IV. Accounting for 14. Bankruptcy: Liquidation © The McGraw−Hill
Accounting, Tenth Edition Fiduciaries and Reorganization Companies, 2005

612 Part Four Accounting for Fiduciaries

SANDERS COMPANY
Balance Sheet
(prior to filing of debtor’s bankruptcy petition)
June 30, 2006

Assets
Current assets:
Cash $ 2,700
Notes receivable and accrued interest, less allowance
for doubtful notes, $6,000 13,300
Trade accounts receivable, less allowance for
doubtful accounts, $23,240 16,110
Inventories, at first-in, first-out cost:
Finished goods 12,000
Goods in process 35,100
Material 19,600
Factory supplies 6,450
Short-term prepayments 950
Total current assets $106,210
Plant assets, at cost:
Land $ 20,000
Buildings (net) 41,250
Machinery (net) 48,800
Tools (net) 14,700
Net plant assets 124,750
Total assets $230,960

Liabilities and Stockholders’ Equity

Current liabilities:
Notes payable:
Pacific National Bank, including accrued interest
(due June 30, 2007) $ 15,300
Suppliers, including accrued interest
(due May 31, 2007) 51,250
Trade accounts payable 52,000
Salaries and wages payable 8,850
Property taxes payable 2,900
Interest payable on first mortgage bonds 1,800
FICA and income taxes withheld and accrued 1,750
Total current liabilities $133,850
First mortgage bonds payable 90,000
Total liabilities $223,850
Stockholders’ equity:
Common stock, $100 par; 750 shares
authorized, issued, and outstanding $ 75,000
Deficit (67,890) 7,110
Total liabilities and stockholders’ equity $230,960
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Accounting, Tenth Edition Fiduciaries and Reorganization Companies, 2005

Chapter 14 Bankruptcy: Liquidation and Reorganization 613

Other information available from notes to financial statements and from estimates of
current fair values of assets follows:

1. Notes receivable with a face amount plus accrued interest totaling $15,300, and a cur-
rent fair value of $13,300, collateralize the notes payable to Pacific National Bank.
2. Finished goods are expected to be sold at a markup of 331⁄3% over cost, with disposal
costs estimated at 20% of selling prices. Estimated cost to complete goods in process
is $15,400, of which $3,700 would be cost of material and factory supplies used. The
estimated selling price of goods in process when completed is $40,000, with disposal
costs estimated at 20% of selling prices. Estimated current fair values for material and
factory supplies not required to complete goods in process are $8,000 and $1,000, re-
spectively. All short-term prepayments are expected to be consumed in the course of
liquidation.
3. Land and buildings, which collateralize the first mortgage bonds payable, have a current
fair value of $95,000. Machinery with a carrying amount of $18,200 and current fair
value of $10,000 collateralizes notes payable to suppliers in the amount of $12,000, in-
cluding accrued interest. The current fair value of the remaining machinery is $9,000,
net of disposal costs of $1,000, and the current fair value of tools after the amounts used
to complete the goods in process inventory is $3,255.
4. Salaries and wages payable are debts having priority under the Bankruptcy Code.
5. Costs of administering the bankruptcy liquidation are estimated at $1,905.

The statement of affairs for Sanders Company on June 30, 2006, is as shown on
page 614.
The following points should be stressed in the review of the June 30, 2006, statement of
affairs for Sanders Company:

1. The “Carrying Amount” columns in the statement of affairs serve as a tie-in to the bal-
ance sheet of Sanders on June 30, 2006, as well as a basis for estimating expected losses
or gains on realization of assets.
2. Assets are assigned to one of three groups: pledged for fully secured liabilities, pledged
for partially secured liabilities, and free. This grouping of assets facilitates the compu-
tation of estimated amounts available for unsecured creditors—those with priority and
those without priority.
3. Liabilities are grouped in the categories reported by a debtor in the exhibits supporting
a debtor’s bankruptcy petition (see pages 608–609): unsecured with priority, fully se-
cured, partially secured, and unsecured without priority.
4. An offset technique used where the legal right of setoff exists. For example, amounts
due to fully secured creditors are deducted from the estimated current fair value of
the assets serving as collateral; and unsecured liabilities with priority are deducted
from estimated amounts available to unsecured creditors from the proceeds of free asset
realization.
5. An estimated settlement per dollar of unsecured liabilities without priority is computed
by dividing the estimated amount available for unsecured, nonpriority creditors by the
total unsecured liabilities, thus:

$60,960

64 cents on the dollar
$95,250

This computation enables the bankruptcy trustee to estimate the amount of cash that will
be available to unsecured, nonpriority creditors in a liquidation proceeding.
 614
SANDERS COMPANY
Statement of Affairs
June 30, 2006

Current Estimated Loss or

Carrying Fair Amount (Gain) on Carrying Amount
Amounts Assets Values Available Realization Amounts Liabilities and Stockholders’ Equity Unsecured
Accounting, Tenth Edition
Larsen: Modern Advanced

Assets Pledged for Fully Unsecured Liabilities with Priority:

Secured Liabilities: Estimated administrative costs $ 1,905
$ 20,000 Land f$ 95,000 $(33,750) $ 8,850 Salaries and wages payable 8,850
41,250 Buildings 2,900 Property taxes payable 2,900
Less: Fully secured liabilities 1,750 FICA and income taxes withheld and accrued 1,750
Part Four Accounting for Fiduciaries
Fiduciaries

(contra) 91,800 $ 3,200 Total (deducted contra) $15,405

Assets Pledged for Partially Fully Secured Liabilities:
IV. Accounting for

Secured Liabilities: 90,000 First mortgage bonds payable $90,000

13,300 Notes and interest receivable 1,800 Accrued interest on first mortgage bonds
(deducted contra) $ 13,300 payable 1,800
18,200 Machinery (deducted contra) $ 10,000 8,200 Total (deducted contra) $91,800
Free Assets: Partially Secured Liabilities:
2,700 Cash $ 2,700 2,700 15,300 Notes and accrued interest payable to Pacific
16,110 Trade accounts receivable 16,110 16,110 National Bank $15,300
Inventories: Less: Net realizable value of notes receivable
and Reorganization

12,000 Finished goods 12,800 12,800 (800) pledged as collateral (contra) 13,300 $ 2,000
35,100 Goods in process 20,300* 20,300* 14,800 12,000 Notes and accrued interest payable to
14. Bankruptcy: Liquidation

19,600 Material 8,000 8,000 11,600 suppliers $12,000

6,450 Factory supplies 1,000 1,000 5,450 Less: Estimated realizable value of machinery
950 Short-term prepayments -0- -0- 950 pledged as collateral (contra) 10,000 2,000
30,600 Machinery 9,000 9,000 21,600
14,700 Tools 3,255 3,255 11,445 Unsecured Liabilities without Priority:
Total estimated amount available $76,365 $ 39,495 39,250 Notes payable to suppliers 39,250
Less: Unsecured liabilities with priority (contra) 15,405 52,000 Trade accounts payable 52,000
Estimated amount available for unsecured, 7,110 Stockholders’ equity
nonpriority creditors (64¢ on the dollar) $60,960
Estimated deficiency to unsecured, nonpriority
creditors (36¢ on the dollar) 34,290
$230,960 $95,250 $ 230,960 $95,250

*Estimated selling price $ 40,000

(11,700)
Companies, 2005

Less: Estimated “out-of-pocket” completion costs ($15,400  $3,700)

© The McGraw−Hill

Estimated disposal costs ($40,000  0.20) (8,000)

Net realizable value $ 20,300
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Accounting, Tenth Edition Fiduciaries and Reorganization Companies, 2005

Chapter 14 Bankruptcy: Liquidation and Reorganization 615

Estimated Amounts to Be Recovered by Each

Class of Creditors
By reference to the statement of affairs on page 614, the accountant for the trustee in bank-
ruptcy for Sanders Company may prepare the summary of estimated amounts to be recov-
ered by each class of Sanders’s creditors shown below:

SANDERS COMPANY
Estimated Amounts to Be Recovered by Creditors
June 30, 2006

Estimated
Class of Creditors Total Claims Computation Recovery
Unsecured with priority $ 15,405 100% $ 15,405
Fully secured 91,800 100% 91,800
Partially secured 27,300 $23,300  ($4,000  0.64) 25,860
Unsecured without priority 91,250 64% 58,400
Totals $225,755* $191,465†

*$15,405  $91,800  $15,300  $12,000  $39,250  $52,000
$225,755.

†$95,000  $13,300  $10,000  ($76,365  $3,200)
$191,465.

Accounting and Reporting for Trustee

Traditionally, the accounting records and reports for trustees have been extremely detailed
and elaborate. However, the provisions of the applicable Federal Rule of Bankruptcy Pro-
cedure are general. Therefore, simple accounting records and reports such as the following
should be adequate.
1. The accounting records of the debtor should be used during the period that a trustee car-
ries on the operations of the debtor’s business.
2. An accountability technique should be used once the trustee begins realization of the
debtor’s assets. In the accountability method of accounting, the assets and liabilities for
which the trustee is responsible are entered in the accounting records of the trustee at
their statement of affairs valuations, with a balancing debit to a memorandum-type
ledger account with a title such as Estate Deficit. The amount of the debit to Estate
Deficit is equal to the estimated deficiency to unsecured creditors reported in the state-
ment of affairs. Appropriate cash receipts and cash payments journal entries are made
for the trustee’s realization of assets and payment of liabilities. No “gain” or “loss”
ledger account is necessary because a business enterprise in liquidation does not require
an income statement. Differences between cash amounts realized or paid and carrying
amounts of the related assets or liabilities are debited or credited to the Estate Deficit
ledger account.
3. The interim and final reports of the trustee to the bankruptcy court are a statement of
cash receipts and cash payments, a statement of realization and liquidation, and, for
interim reports, supporting exhibits of assets not yet realized and liabilities not yet
liquidated.

Illustration of Accountability Technique

Assume that Arline Wells, the trustee in the voluntary bankruptcy liquidation pro-
ceedings for Sanders Company (see page 612), took custody of the assets of Sanders on
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Accounting, Tenth Edition Fiduciaries and Reorganization Companies, 2005

616 Part Four Accounting for Fiduciaries

June 30, 2006. The accountant for the trustee prepared the following journal entry on
June 30, 2006.

Journal Entry for SANDERS COMPANY, IN BANKRUPTCY

Bankruptcy Trustee Arline Wells, Trustee
Journal Entry
June 30, 2006

Cash 2,700
Notes and Interest Receivable 13,300
Trade Accounts Receivable 16,110
Finished Goods Inventory 12,800
Goods in Process Inventory 20,300
Material Inventory 8,000
Factory Supplies 1,000
Land and Buildings 95,000
Machinery ($10,000  $9,000) 19,000
Tools 3,255
Estate Deficit 34,290 (1)
Estimated Administrative Costs 1,905
Notes and Interest Payable ($15,300  $12,000  $39,250) 66,550
Trade Accounts Payable 52,000
Salaries and Wages Payable 8,850
Property Taxes Payable 2,900
FICA and Income Taxes Withheld and Accrued 1,750
Interest Payable on First Mortgage Bonds 1,800
First Mortgage Bonds Payable 90,000
To record current fair values of assets and liabilities of Sanders Company,
in bankruptcy liquidation proceedings.

(1) Equal to estimated deficiency to unsecured, nonpriority creditors in the statement of affairs on page 614.

When the trustee realizes assets of Sanders, the appropriate journal entry is a debit
to Cash, credits to the asset ledger accounts, and a debit or credit to the Estate Deficit ac-
count for a loss or gain on realization, respectively. Costs of administering the estate that
exceed the $1,905 liability also are debited to the Estate Deficit ledger account.

Statement of Realization and Liquidation

The traditional statement of realization and liquidation was a complex and not too readable
accounting presentation. A form of realization and liquidation statement that should be
more useful to the bankruptcy court than the traditional statement is as follows. This finan-
cial statement is based on the assumed activities of the trustee for the estate of Sanders
Company during the month of July 2006, including operating the business long enough to
complete and sell the goods in process inventory.
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Chapter 14 Bankruptcy: Liquidation and Reorganization 617

Interim Statement of SANDERS COMPANY, IN BANKRUPTCY

Realization and Arline Wells, Trustee
Liquidation for Trustee Statement of Realization and Liquidation
in Bankruptcy For Month Ended July 31, 2006
Liquidation
Estate deficit, June 30, 2006 $34,290
Assets realized:

Current Fair
Values, Realization Loss or
June 30, 2006 Proceeds (Gain)
Trade accounts receivable $14,620 $12,807 $ 1,813
Finished goods inventory 12,800 11,772 1,028
Goods in process inventory 14,820 15,075 (255)
Totals $42,240 $39,654 2,586
Liabilities with priority liquidated
at carrying amounts:
Salaries and wages payable $ 8,850
Property taxes payable 2,900
FICA and income taxes
withheld and accrued 1,750
Total liabilities with priority
liquidated $13,500
Administrative costs paid, $1,867
($1,905 had been estimated) (38)
Estate deficit, July 31, 2006 $36,838

An accompanying statement of cash receipts and cash payments for the month ended
July 31, 2006, would show the sources of the $39,654 total realization proceeds, and the
dates, check numbers, payees, and amounts of the $13,500 paid for liabilities with priority
and the $1,867 paid for administrative costs. Supporting exhibits would summarize assets
not yet realized and liabilities not yet paid.
Liquidation involves realization of the assets of the debtor’s estate. In many cases, an in-
solvent debtor may be restored to a sound financial footing if it can defer payment of its
debts. Chapter 11 of the Bankruptcy Code, dealing with reorganization, enables a debtor to
continue operations under court protection from creditor lawsuits while it formulates a plan
to pay its debts. Reorganization is discussed in the next section.

BANKRUPTCY REORGANIZATION
Chapter 11 of the Bankruptcy Code provides for the court-supervised reorganization of a
debtor business enterprise. Typically, a reorganization involves the reduction of amounts
payable to some creditors, other creditors’ acceptance of equity securities of the debtor for
their claims, and a revision of the par or stated value of the common stock of the debtor.
A debtor’s (voluntary) petition for reorganization may be filed by a railroad or by any
“person” eligible to petition for liquidation (see pages 608–609) except a stockbroker or a
commodity broker. Requirements for a creditors’ (involuntary) petition for reorganization
are the same as the requirements for a liquidation petition (see page 609).
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618 Part Four Accounting for Fiduciaries

Appointment of Trustee or Examiner

During the process of reorganization, management or owners of the business enterprise
may continue to operate the enterprise as debtor in possession. Alternatively, the bank-
ruptcy court may appoint a trustee to manage the enterprise. A trustee is appointed because
of fraud, dishonesty, incompetence, or gross mismanagement by current owners or man-
agers, or to protect the interests of creditors or stockholders of the enterprise. In some re-
organization cases not involving a trustee, the court may appoint an examiner to investigate
possible fraud or mismanagement by the current managers or owners of the enterprise; the
appointment of an examiner is limited to enterprises having unsecured liabilities, other than
payables for goods, services, or taxes, exceeding $5 million.
Among the powers and duties of the trustee are the following:
1. Prepare and file in court a list of creditors of each class and their claims and a list of
stockholders of each class.
2. Investigate the acts, conduct, property, liabilities, and business operations of the enter-
prise, consider the desirability of continuing operations, and formulate a plan for such
continuance for submission to the bankruptcy judge if management of the debtor has not
done so.
3. Report to the bankruptcy judge any facts ascertained as to fraud against or mismanage-
ment of the debtor enterprise.

Plan of Reorganization
The plan of reorganization submitted by the management or the trustee to the bank-
ruptcy court is given to the debtor enterprise’s creditors and stockholders, to the U.S.
Secretary of the Treasury, and possibly to the SEC. The plan must include provisions
altering or modifying the interests and rights of the creditors and stockholders of the
debtor enterprise, as well as a number of additional provisions. The SEC may review
the plan and may be heard in the bankruptcy court’s consideration of the plan. Before
a plan of reorganization is confirmed by the bankruptcy court, the plan must be ac-
cepted by a majority of the creditors, whose claims must account for two-thirds of the
total liabilities, and by stockholders owning at least two-thirds of the outstanding capi-
tal stock of each class. If one or more classes of stockholders or creditors has not
accepted a plan, the bankruptcy court may confirm the plan if the plan is fair and
equitable to the nonacceptors. Confirmation of the plan of reorganization by the bank-
ruptcy court makes the plan binding on the debtor enterprise, on all creditors and own-
ers of the enterprise, and on any other enterprise issuing securities or acquiring property
under the plan.

Accounting for a Reorganization

The accounting for a reorganization typically requires journal entries for adjustments
of carrying amounts of assets; reductions of par or stated value of capital stock (with
recognition of resultant paid-in capital in excess of par or stated value); extensions of due
dates and revisions of interest rates of notes payable; exchanges of equity securities for
debt securities; and the elimination of a retained earnings deficit. The latter entry is as-
sociated with fresh start reporting for a reorganized enterprise whose liabilities exceed
the reorganization value (essentially current fair value) of its assets.2 Because of

2
Statement of Position 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy
Code” (New York: AICPA, 1990), par. 36.
Larsen: Modern Advanced IV. Accounting for 14. Bankruptcy: Liquidation © The McGraw−Hill
Accounting, Tenth Edition Fiduciaries and Reorganization Companies, 2005

Chapter 14 Bankruptcy: Liquidation and Reorganization 619

changes in the ownership of common stock of such an enterprise as a result of the reor-
ganization, it is no longer controlled by its former stockholder group, and it essentially is
a new reporting enterprise whose assets and liabilities should be valued at current fair
values and whose stockholders’ equity consists only of paid-in capital.3
It is important for accountants to be thoroughly familiar with the plan of reorganiza-
tion, in order to account properly for its implementation. Accountants must be careful
to avoid charging post-reorganization operations with losses that arose before the reor-
ganization.
To illustrate the accounting for a reorganization, assume that Sanders Company (see
pages 611–615) filed a petition for reorganization, rather than for liquidation, on June 30,
2006, with Sanders management as debtor in possession. The plan of reorganization, which
was approved by stockholders and all unsecured creditors and confirmed by the bankruptcy
court, included the following:
1. Deposit $25,000 with escrow agent, as soon as cash becomes available, to cover liabili-
ties with priority and costs of reorganization proceedings.
2. Amend articles of incorporation to provide for 10,000 shares of authorized common
stock of $1 par. The new common stock is to be exchanged on a share-for-share basis for
the 750 shares of outstanding $100 par common stock.
3. Extend due date of unsecured notes payable to suppliers totaling $15,250 for four years,
until May 31, 2011. Increase the interest rate on the notes from the stated rate of 14% to
18%, the current fair rate of interest.
4. Exchange 1,600 shares of new $1 par common stock (at current fair value of $15 a
share) for unsecured notes payable to suppliers totaling $24,000.
5. Pay suppliers 70 cents per dollar of trade accounts payable owed.
The journal entries below and on page 620, numbered to correspond with the provisions
of the reorganization plan outlined above, were recorded by Sanders Company as cash be-
came available from operations. Assuming that fresh start reporting is appropriate for
Sanders Company after the plan of reorganization has been carried out, the last journal
entry on page 620 is appropriate for eliminating the $67,890 retained earnings deficit of
Sanders on June 30, 2006.

Journal Entries for SANDERS COMPANY

Bankruptcy Journal Entries
Reorganization
(1) Cash with Escrow Agent 25,000
Cash 25,000
To record deposit of cash with escrow agent under terms of bankruptcy
reorganization.
Salaries and Wages Payable 8,850
Property Taxes Payable 2,900
FICA and Income Taxes Withheld and Accrued 1,750
Cash with Escrow Agent 13,500
To record escrow agent’s payment of liabilities with priority.

(continued)

3
Ibid., par. 39.
 Larsen: Modern Advanced IV. Accounting for 14. Bankruptcy: Liquidation © The McGraw−Hill
Accounting, Tenth Edition Fiduciaries and Reorganization Companies, 2005

620 Part Four Accounting for Fiduciaries

SANDERS COMPANY
Journal Entries (concluded)

Costs of Bankruptcy Proceedings 11,000

Cash with Escrow Agent 11,000
To record escrow agent’s payment of costs of bankruptcy proceedings.
(2) Common Stock, $100 par 75,000
Common Stock, $1 par 750
Paid-in Capital in Excess of Par 74,250
To record issuance of 750 shares of $1 par common stock in exchange
for 750 shares of $100 par common stock.
(3) 14% Notes Payable to Suppliers, due May 31, 2007 15,250
18% Notes Payable to Suppliers, due May 31, 2011 15,250
To record extension of due dates of notes payable to suppliers and
increase of interest rate to 18% from 14%.
(4) Notes Payable to Suppliers 24,000
Common Stock, $1 par 1,600
Paid-in Capital in Excess of Par 22,400
To record exchange of 1,600 shares of $1 par common stock
for $24,000 face amount of notes payable, at current fair value
of $15 a share.
(5) Trade Accounts Payable 52,000
Cash 36,400
Gain from Discharge of Indebtedness in Bankruptcy 15,600
To record payment of $0.70 per dollar of accounts payable to suppliers.

Journal Entry to Paid-in Capital in Excess of Par 63,290

Eliminate Deficit Gain from Discharge of Indebtedness in Bankruptcy 15,600
Costs of Bankruptcy Proceedings 11,000
Retained Earnings 67,890
To eliminate deficit on June 30, 2006, and close bankruptcy
gain and costs to Paid-in Capital in Excess of Par ledger account.

The effect of the foregoing journal entries is to show a “clean slate” for Sanders Com-
pany as a result of the approved bankruptcy reorganization and the write-off of the retained
earnings deficit existing on the date of the petition for reorganization. The extension of due
dates of some liabilities, conversion of other liabilities to common stock, and liquidation of
trade accounts payable at less than their face amount should enable Sanders to resume op-
erations as a going concern. For a reasonable number of years following the reorganization,
Sanders might “date” the retained earnings in its balance sheets to disclose that the earn-
ings were accumulated after the reorganization.

Disclosure of Reorganization
The elaborate and often complex issues involved in a bankruptcy reorganization are dis-
closed in a note to the financial statements for the period in which the plan of reorganiza-
tion was carried out. Examples of recent such disclosures are included in the AICPA’s 1994
publication Illustrations of Financial Reporting by Entities in Reorganization under the
Larsen: Modern Advanced IV. Accounting for 14. Bankruptcy: Liquidation © The McGraw−Hill
Accounting, Tenth Edition Fiduciaries and Reorganization Companies, 2005

Chapter 14 Bankruptcy: Liquidation and Reorganization 621

Bankruptcy Code. In addition, the Summary of Significant Accounting Policies note to fi-

nancial statements of a reorganized enterprise might include disclosures such as the fol-
lowing for Wang Laboratories, Inc., a publicly owned enterprise:
Bankruptcy-Related Accounting
The Company has accounted for all transactions related to the Chapter 11 case in accordance
with Statement of Position 90-7 (“SOP 90-7”), “Financial Reporting by Entities in Reorgani-
zation under the Bankruptcy Code,” which was issued by the American Institute of Certified
Public Accountants in November 1990. Accordingly, liabilities subject to compromise under
the Chapter 11 case have been segregated on the Consolidated Balance Sheet and are recorded
for the amounts that have been or are expected to be allowed on known claims rather than esti-
mates of the amounts those claims are to receive under the Reorganization Plan. In addition,
the Consolidated Statements of Operations and Consolidated Statements of Cash Flows for
the year ended June 30, 1993 separately disclose expenses and cash transactions, respectively,
related to the Chapter 11 case (see Note C, Reorganization and Restructuring). In accordance
with SOP 90-7, no interest has been accrued on pre-petition, unsecured debt. Additionally, in-
terest income earned by WLI subsequent to the filing of Chapter 11 is reported as a reduction
of reorganization items. The reorganized Company will account for the Reorganization Plan
utilizing the “Fresh-Start” reporting principles contained in SOP 90-7.4

Review 1. Define insolvency as that term is used in the Bankruptcy Code for an entity other than
Questions a partnership.
2. What are Federal Rules of Bankruptcy Procedure?
3. Identify the various classes of creditors whose claims are dealt with in bankruptcy
liquidations.
4. Describe the process of liquidation under Chapter 7 of the Bankruptcy Code.
5. Differentiate between a debtor’s petition and a creditors’ petition.
6. May any business enterprise file a debtor’s bankruptcy petition for liquidation?
Explain.
7. Who may file a creditors’ petition for bankruptcy liquidation?
8. What is a statement of financial affairs under the Bankruptcy Code?
9. List the unsecured debts having priority over other unsecured debts under the provi-
sions of the Bankruptcy Code.
10. Describe the priority of claims for wages and salaries under the Bankruptcy Code.
11. Describe the authority of a bankruptcy trustee with respect to a preference.
12. What are the effects of a discharge in bankruptcy liquidation proceedings? Explain.
13. What use is made of the accounting financial statement known as a statement of
affairs? Explain.
14. Describe the accountability method of accounting used by a trustee in a bankruptcy
liquidation.
15. For what types of bankruptcy reorganizations might an examiner be appointed by the
bankruptcy court?
16. What is the role of the Securities and Exchange Commission in a bankruptcy reorga-
nization?

4
AICPA, Accounting Trends & Techniques, 48th ed. (New York: 1994), p. 35.
 Larsen: Modern Advanced IV. Accounting for 14. Bankruptcy: Liquidation © The McGraw−Hill
Accounting, Tenth Edition Fiduciaries and Reorganization Companies, 2005

622 Part Four Accounting for Fiduciaries

17. Must all classes of creditors accept a reorganization plan before the plan may be con-
firmed by the bankruptcy court? Explain.
18. What is fresh-start reporting for a business enterprise reorganized under Chapter 11
of the Bankruptcy Code, and under what circumstances is it appropriate?

Exercises
(Exercise 14.1) Select the best answer for each of the following multiple-choice questions:
1. A category of assets that typically has zero in the Estimated Amount Available column
of a statement of affairs is:
a. Factory supplies inventory
b. Tools
c. Short-term prepayments
d. None of the foregoing
2. In a bankruptcy proceeding, the term statement of affairs refers to:
a. A document containing a series of questions concerning all aspects of the debtor’s
financial condition and operations.
b. A financial statement prepared in lieu of a balance sheet.
c. Both a and b.
d. Neither a nor b.
3. The number of classes of creditors in a bankruptcy liquidation is:
a. Two
b. Three
c. Four
d. Five
4. The Paid-in Capital in Excess of Par ledger account of a debtor corporation undergo-
ing bankruptcy reorganization typically is debited or credited for:
a. Costs of bankruptcy proceedings.
b. Gain from discharge of indebtedness in bankruptcy.
c. Retained earnings deficit.
d. All the foregoing items.
e. None of the foregoing items.
5. The bankruptcy trustee for Insolvent Company sold assets having a carrying amount
of $10,000 for $8,500 cash. The journal entry (explanation omitted) to record the
sale is:
a. Cash 8,500
Loss on Realization of Assets 1,500
Assets 10,000
b. Cash 8,500
Estate Administration Expenses 1,500
Assets 10,000
c. Cash 8,500
Cost of Goods Sold 10,000
Sales 8,500
Assets 10,000
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Accounting, Tenth Edition Fiduciaries and Reorganization Companies, 2005

Chapter 14 Bankruptcy: Liquidation and Reorganization 623

d. Cash 8,500
Estate Deficit 1,500
Assets 10,000
6. In a statement of affairs (financial statement), assets pledged for partially secured lia-
bilities are:
a. Included with assets pledged for fully secured liabilities.
b. Offset against partially secured liabilities.
c. Included with free assets.
d. Disregarded.
7. Regis Company is being liquidated in bankruptcy. Unsecured creditors without prior-
ity are expected to be paid 50 cents on the dollar. Sardo Company is the payee of a note
receivable from Regis in the amount of $50,000 (including accrued interest), which is
collateralized by machinery with a current fair value of $10,000. The total amount ex-
pected to be realized by Sardo on its note receivable from Regis is:
a. $35,000
b. $30,000
c. $25,000
d. $10,000
e. Some other amount
8. In journal entries for a bankruptcy reorganization, the difference between the carrying
amount of a liability of the debtor and the amount accepted by the creditor in full set-
tlement of the liability is credited to:
a. Retained Earnings (Deficit).
b. Paid-in Capital in Excess of Par or Stated Value.
c. Paid-in Capital from Reorganization.
d. Cash with Escrow Agent.
e. Some other ledger account.
9. With respect to the terms bankrupt and insolvent as adjectives:
a. Bankrupt refers to a legal state; insolvent refers to the financial condition of a per-
son or a business enterprise.
b. Bankrupt refers to the financial condition of a person or a business enterprise;
insolvent refers to a legal state.
c. Both bankrupt and insolvent refer to the financial condition of a person or a busi-
ness enterprise.
d. Bankrupt and insolvent properly may be used as interchangeable adjectives.
10. The accounting records of a trustee in a bankruptcy liquidation are maintained:
a. Under the accrual basis of accounting.
b. Under the cost basis of accounting.
c. Under an accountability technique.
d. In accordance with the bankruptcy court’s instructions.
11. Under the Bankruptcy Code, are creditors having priority:

Secured Creditors? Unsecured Creditors?

a. Yes Yes
b. Yes No
c. No Yes
d. No No
 Larsen: Modern Advanced IV. Accounting for 14. Bankruptcy: Liquidation © The McGraw−Hill
Accounting, Tenth Edition Fiduciaries and Reorganization Companies, 2005

624 Part Four Accounting for Fiduciaries

12. The period of time that must elapse before a debtor that has had a previous bankruptcy
discharge may again be discharged is:
a. Four years
b. Five years
c. Six years
d. Seven years
13. The sequence of listing (1) fully secured liabilities, (2) partially secured liabilities,
(3) unsecured liabilities with priority, and (4) unsecured liabilities without priority in
the liabilities and stockholders’ equity section of a statement of affairs is:
a. (1), (2), (3), (4)
b. (3), (1), (2), (4)
c. (1), (3), (2), (4)
d. (1), (3), (4), (2)
14. The following journal entry (explanation omitted) was prepared by an enterprise that
had filed a debtor’s petition in bankruptcy:

Cash with Escrow Agent 100,000

Cash 100,000

Such a journal entry generally is related to:

a. A liquidation only.
b. A reorganization only.
c. Either a liquidation or a reorganization.
d. Neither a liquidation nor a reorganization.
15. The estimated amount available for free assets in a statement of affairs for a business
enterprise undergoing bankruptcy liquidation is equal to the assets’:
a. Carrying amounts less current fair values.
b. Carrying amounts plus gain or less loss on realization.
c. Carrying amounts plus loss or less gain on realization.
d. Current fair values less carrying amounts.
16. A retained earnings deficit of a business enterprise undergoing bankruptcy reorgani-
zation typically is eliminated by its:
a. Offset against gain from discharge of indebtedness in bankruptcy.
b. Inclusion with costs of bankruptcy proceedings.
c. Offset against legal capital.
d. Offset against additional paid-in capital.
17. On April 30, 2006, Carson Welles, trustee in bankruptcy liquidation for Lyle Company,
paid $12,140 in full settlement of Lyle’s liability under product warranty, which had
been carried in Welles’s accounting records at $10,000. The appropriate journal entry
for Welles (explanation omitted) is:
a. Liability under Product Warranty 12,140
Cash 12,140
b. Liability under Product Warranty 10,000
Estate Deficit 2,140
Cash 12,140
c. Liability under Product Warranty 10,000
Product Warranty Expense 2,140
Cash 12,140
Larsen: Modern Advanced IV. Accounting for 14. Bankruptcy: Liquidation © The McGraw−Hill
Accounting, Tenth Edition Fiduciaries and Reorganization Companies, 2005

Chapter 14 Bankruptcy: Liquidation and Reorganization 625

d. Liability under Product Warranty 10,000

Retained Earnings (Prior Period Adjustment) 2,140
Cash 12,140
(Exercise 14.2) The December 18, 2006, statement of affairs of Downside Company, which is in bankruptcy
liquidation, included the following:

CHECK FIGURE
Assets pledged for fully secured liabilities $100,000
To partially secured
Assets pledged for partially secured liabilities 40,000
liabilities, $48,000.
Free assets 120,000
Fully secured liabilities 80,000
Partially secured liabilities 50,000
Unsecured liabilities with priority 60,000
Unsecured liabilities without priority 90,000

Prepare a working paper to show the estimated amount of assets expected to be received
by each of the four classes of creditors of Downside Company in its bankruptcy liquidation.
(Exercise 14.3) Amounts related to the statement of affairs of Foldup Company, in bankruptcy liquidation
on April 30, 2006, were as follows:

CHECK FIGURE
Assets pledged for fully secured liabilities $ 80,000
Estimated deficiency,
Assets pledged for partially secured liabilities 50,000
$100,000.
Free assets 280,000
Fully secured liabilities 60,000
Partially secured liabilities 80,000
Unsecured liabilities with priority 40,000
Unsecured liabilities without priority 330,000

Prepare a working paper to compute the total estimated deficiency to unsecured, non-
priority creditors, and the cents per dollar that such creditors may expect to receive from
Foldup Company.
(Exercise 14.4) Data from the April 30, 2006, statement of affairs of Windup Company, which was under-
going bankruptcy liquidation, included the following:

CHECK FIGURE
Assets pledged for fully secured liabilities $70,000
To partially secured
Assets pledged for partially secured liabilities 30,000
liabilities, $35,000.
Free assets 50,000
Fully secured liabilities 60,000
Partially secured liabilities 40,000
Unsecured liabilities with priority 30,000
Unsecured liabilities without priority 50,000

Prepare a working paper to show how Windup Company’s assets on April 30, 2006, are
expected to be apportioned to Windup’s creditors’ claims on that date.
 Larsen: Modern Advanced IV. Accounting for 14. Bankruptcy: Liquidation © The McGraw−Hill
Accounting, Tenth Edition Fiduciaries and Reorganization Companies, 2005

626 Part Four Accounting for Fiduciaries

(Exercise 14.5) Components of the December 17, 2006, statement of affairs of Liquo Company, which was
undergoing liquidation under Chapter 7 of the Bankruptcy Code, included the following:

CHECK FIGURE
Assets pledged for fully secured liabilities, at current fair value $150,000
To partially secured
Assets pledged for partially secured liabilities, at current fair value 104,000
liabilities, $114,400.
Free assets, at current fair value 80,000
Fully secured liabilities 60,000
Partially secured liabilities 120,000
Unsecured liabilities with priority 14,000
Unsecured liabilities without priority 224,000

Prepare a working paper dated December 17, 2006, to compute the amount expected to
be paid to each class of creditors of Liquo Company. The following column headings are
suggested: Class of Creditor, Total Claims, Computation, Estimated Amount. The total of
the Estimated Amount column should equal total assets, $334,000.
(Exercise 14.6) Scott Company filed a debtor’s bankruptcy petition on June 25, 2006, and its statement of
affairs included the following amounts:

CHECK FIGURE Carrying Current

Cash received by
Amounts Fair Values
partially secured
creditors, $84,000. Assets
Assets pledged for fully secured liabilities $160,000 $190,000
Assets pledged for partially secured liabilities 90,000 60,000
Free assets 200,000 140,000
Totals $450,000 $390,000

Liabilities
Unsecured liabilities with priority $ 20,000
Fully secured liabilities 130,000
Partially secured liabilities 100,000
Unsecured liabilities without priority 260,000
Total $510,000

Assuming that Scott Company’s assets realized cash at the current fair values and the
business was liquidated by the bankruptcy trustee, prepare a working paper to compute
the amount of cash that the partially secured creditors should receive.
(Exercise 14.7) The statement of affairs for Wick Corporation shows that approximately 78 cents on the
dollar probably will be paid to unsecured creditors without priority. Wick owes Stark Com-
CHECK FIGURE pany $23,000 on a promissory note, plus accrued interest of $940. Inventories with a cur-
Amount to Stark rent fair value of $19,200 collateralize the note payable.
Company, $22,897. Prepare a working paper to compute the amount that Stark Company should receive
from the trustee of Wick Corporation, assuming that actual payments to unsecured credi-
tors without priority amount to 78 cents on the dollar. Round all amounts to the nearest
dollar.
Larsen: Modern Advanced IV. Accounting for 14. Bankruptcy: Liquidation © The McGraw−Hill
Accounting, Tenth Edition Fiduciaries and Reorganization Companies, 2005

Chapter 14 Bankruptcy: Liquidation and Reorganization 627

(Exercise 14.8) Decker Company filed a debtor’s bankruptcy petition on August 15, 2006, and its statement
of affairs included the following amounts:

CHECK FIGURE Carrying Current

Cash available,
Amounts Fair Values
$180,000.
Assets
Assets pledged for fully secured liabilities $150,000 $185,000
Assets pledged for partially secured liabilities 90,000 60,000
Free assets 210,000 160,000
Totals $450,000 $405,000

Liabilities
Unsecured liabilities with priority $ 35,000
Fully secured liabilities 130,000
Partially secured liabilities 100,000
Unsecured liabilities without priority 270,000
Total $535,000

Assuming that Decker Company’s assets realized cash at the current fair values and the
business was liquidated by the bankruptcy trustee, prepare a working paper to compute
the amount of cash available to pay unsecured liabilities without priority.
(Exercise 14.9) Prepare a working paper to compute the estimated amount expected to be paid to each
class of creditors, using the following data taken from the statement of affairs for Kent
Corporation:

CHECK FIGURE Assets pledged for fully secured liabilities (current fair value, $75,000) $ 90,000
To partially secured
Assets pledged for partially secured liabilities (current fair value, $52,000) 74,000
creditors, $57,200.
Free assets (current fair value, $40,000) 70,000
Unsecured liabilities with priority 7,000
Fully secured liabilities 30,000
Partially secured liabilities 60,000
Unsecured liabilities without priority 112,000

(Exercise 14.10) The following information for Progress Book Company on May 31, 2006, was obtained by
an accountant retained by Progress Book’s creditors:
1. Furniture and fixtures: Carrying amount, $70,000; current fair value, $60,500; pledged
on a note payable of $42,000 on which unpaid interest of $800 has accrued.
2. Book manuscripts owned: Carrying amount, $15,000; current fair value, $7,200; pledged
on a note payable of $9,000; interest on the note is paid to date.
3. Books in process of production: Accumulated cost (direct material, direct labor, and
factory overhead), $37,500; estimated sales value on completion, $60,000; additional
out-of-pocket costs of $14,200 will be required to complete the books in process.
Prepare the headings for the asset side of a statement of affairs for Progress Book Com-
pany on May 31, 2006, and illustrate how each of the three items described is displayed in
the statement.
 Larsen: Modern Advanced IV. Accounting for 14. Bankruptcy: Liquidation © The McGraw−Hill
Accounting, Tenth Edition Fiduciaries and Reorganization Companies, 2005

628 Part Four Accounting for Fiduciaries

(Exercise 14.11) Edward Ross, the trustee in bankruptcy for Winslow Company, set up accounting records
based on the April 30, 2006, statement of affairs for Winslow. The trustee completed the
following transactions and events early in May 2006:
May 2 Sold for $10,000 cash the finished goods inventory with a statement of affairs
valuation of $10,500.
3 Paid wages with a statement of affairs valuation of $8,000.
4 Collected $6,000 on trade accounts receivable with a statement of affairs valu-
ation of $6,200. The remainder was considered to be uncollectible.
7 Paid trustee fee for one week, $500. (Debit Estimated Administrative Costs.)
Prepare journal entries (omit explanations) for Edward Ross, trustee in bankruptcy for
Winslow Company, for the transactions and events described above.
(Exercise14.12) From the following traditional form of statement of realization and liquidation, prepare
a more concise statement of realization and liquidation similar to the one illustrated on
page 617.

CHECK FIGURE REED COMPANY, IN BANKRUPTCY

Estate deficit, Jan. 31,
Selma Ross, Trustee
$7,150. Statement of Realization and Liquidation
For Month of January 2006

Assets to be realized: Liabilities to be liquidated:

Trade accounts receivable $ 7,500 Notes payable $ 5,000
Inventories 12,500 Trade accounts payable 30,000
Equipment 10,000 Interest payable 150
Subtotal $30,000 Subtotal $35,150
Supplementary charges: Liabilities assumed:
Administrative costs 2,950 Interest payable 50
Interest expense 50 Assets realized:
Liabilities liquidated: Trade accounts receivable 6,500
Trade accounts payable 6,000 Inventories 14,500
Liabilities not liquidated: Assets not realized:
Notes payable 5,000 Equipment 10,000
Trade accounts payable 24,000 Net loss 2,000
Interest payable 200
Total $68,200 Total $68,200

(Exercise 14.13) Following are selected provisions of the plan of reorganization for Kolb Company, which is
emerging from Bankruptcy Code Chapter 11 reorganization on July 27, 2006:
(1) Amended articles of incorporation to provide for 100,000 shares of authorized com-
mon stock, $5 par, to be exchanged on a share-for-share basis for 50,000 shares of out-
standing no-par, no-stated-value common stock with a carrying amount of $600,000.
(2) Exchanged 10,000 shares of the new $5 par common stock for trade accounts payable
totaling $70,000.
(3) Paid 80 cents per dollar for full settlement of other trade accounts payable totaling
$60,000.
Larsen: Modern Advanced IV. Accounting for 14. Bankruptcy: Liquidation © The McGraw−Hill
Accounting, Tenth Edition Fiduciaries and Reorganization Companies, 2005

Chapter 14 Bankruptcy: Liquidation and Reorganization 629

Prepare journal entries (omit explanations) for Kolb Company on July 27, 2006, to re-
flect the foregoing elements of its plan of reorganization.

(Exercise 14.14) Among the provisions of the reorganization of Hayward Company under Chapter 11 of the
Bankruptcy Code were the following:
(1) Issued 1,000 shares of $5 par common stock in exchange for 1,000 shares of $100 par
common stock outstanding.
(2) Issued 200 shares of $5 par common stock (current fair value $10 a share) for notes
payable to suppliers with unpaid principal of $2,500 and accrued interest of $500.
(3) Paid $8,000 to suppliers in full settlement of trade accounts payable of $10,000.

Prepare journal entries (omit explanations) for Hayward Company for the foregoing pro-
visions, all of which were completed on January 20, 2006.

Cases
(Case 14.1) The January 29, 1994, balance sheet of Hills Stores Company, a publicly owned enterprise,
included the following asset:

Reorganization value in excess of amounts

allocable to identifiable assets, net $176,718,000

The Intangible Assets section of Hills’s Summary of Significant Accounting Policies note
to financial statements read in part as follows:

Reorganization value in excess of amounts allocable to identifiable assets is being amortized

over 20 years on a straight-line basis. Accumulated amortization was $29,395,000 at January
29, 1994.

The reorganization value accounted for more than 19% of Hills’s total assets of
$907,621,000 on January 29, 1994.

Instructions
What is your opinion of the foregoing balance sheet display and related note disclosures?
Explain, after researching the following:

AICPA Statement of Position 90-7, “Financial Reporting by Entities in Reorganization

under the Bankruptcy Code,” paragraphs 9, 38, 61, and 62.
FASB Statement of Financial Accounting Concepts No. 6, “Elements of Financial
Statements,” paragraphs 25 through 31 and 171 through 177.
FASB Statement of Financial Accounting Standards No. 142, “Goodwill and Other
Intangible Assets,” paragraphs 1, 5, and 10.
FASB Statement of Financial Accounting Standards No. 87, “Employers’ Accounting
for Pensions,” paragraphs 36, 37, and 38, and dissent of Robert T. Sprouse.
 Larsen: Modern Advanced IV. Accounting for 14. Bankruptcy: Liquidation © The McGraw−Hill
Accounting, Tenth Edition Fiduciaries and Reorganization Companies, 2005

630 Part Four Accounting for Fiduciaries

(Case 14.2) In auditing the financial statements of Delbert Company for the six months ended Decem-
ber 31, 2006, you find items a through e below had been debited or credited to the Retained
Earnings ledger account during the six months immediately following a bankruptcy reor-
ganization, which was effective July 1, 2006:
a. Debit of $25,000 arising from an additional income tax assessment applicable to
2005.
b. Credit of $48,000 resulting from gain on disposal of equipment that was no longer
used in the business. This impaired equipment had been written down by a $50,000
increase in the Accumulated Depreciation ledger account on July 1, 2006.
c. Debit of $15,000 resulting from the loss on plant assets destroyed in a fire on November
2, 2006.
d. Debit of $32,000 representing cash dividends declared on preferred stock.
e. Credit of $60,400, the net income for the six-month period ended December 31,
2006.
Instructions
For each of the foregoing items, state whether it is correctly debited or credited to the
Retained Earnings ledger account. Give a brief reason for your conclusion.
(Case 14.3) You have been asked to conduct a training program explaining the preparation of a state-
ment of affairs (financial statement) for the staff of Bixby & Canfield, CPAs.
Instructions
Explain how each of the following is presented in a statement of affairs (financial state-
ment) for a corporation in bankruptcy liquidation proceedings:
a. Assets pledged for partially secured liabilities.
b. Unsecured liabilities with priority.
c. Stockholders’ equity.

Problems
(Problem 14.1) On July 24, 2006, the date the plan of reorganization of Re-Org Company was approved by
the bankruptcy court, Re-Org’s stockholders’ equity was as follows:

Common stock, no par or stated value; authorized 100,000

shares, issued and outstanding 60,000 shares $ 580,000
Deficit (260,000)
Total stockholders’ equity $ 320,000

Included in Re-Org’s plan of reorganization were the following:

1. Authorize payment of $50,000 unrecorded bankruptcy administrative costs by escrow
agent holding special Re-Org cash account.
2. Amend articles of incorporation to change common stock to $1 par from no-par, no-
stated-value stock.
Larsen: Modern Advanced IV. Accounting for 14. Bankruptcy: Liquidation © The McGraw−Hill
Accounting, Tenth Edition Fiduciaries and Reorganization Companies, 2005

Chapter 14 Bankruptcy: Liquidation and Reorganization 631

3. Exchange 10% unsecured $120,000 promissory note payable to supplier (interest unpaid
for three months) for a 12%, two-year promissory note in the total amount of unpaid prin-
cipal and accrued interest on the 10% note.
4. Pay suppliers 80 cents on the dollar (from Re-Org cash account) for their claims total-
ing $100,000.
5. Eliminate deficit against paid-in capital resulting from (2) and gain resulting from (4).

Instructions
Assuming the foregoing were completed on July 24, 2006, prepare journal entries (omit
explanations) for Re-Org Company on that date. Use the following ledger account titles:

Cash Interest Payable

Cash with Escrow Agent 10% Note Payable
Common Stock, no par 12% Note Payable
Common Stock, $1 par Paid-in Capital in Excess of Par
Costs of Bankruptcy Proceedings Retained Earnings (Deficit)
Gain from Discharge of Indebtedness in Trade Accounts Payable
Bankruptcy

(Problem 14.2) The following information was available on October 31, 2006, for Dodge Company, which
cannot pay its liabilities when they are due:

CHECK FIGURE
Carrying
Estimated deficiency,
Amounts
$20,500.
Cash $ 4,000
Trade accounts receivable (net): Current fair value equal to carrying amount 46,000
Inventories: Net realizable value, $18,000; pledged on $21,000 of notes
payable 39,000
Plant assets: Current fair value, $67,400; pledged on mortgage note
payable 134,000
Accumulated depreciation of plant assets 27,000
Supplies: Current fair value, $1,500 2,000
Wages payable, all earned during October 2006 5,800
Property taxes payable 1,200
Trade accounts payable 60,000
Notes payable, $21,000 secured by inventories 40,000
Mortgage note payable, including accrued interest of $400 50,400
Common stock, $5 par 100,000
Deficit 59,400

Instructions
a. Prepare a statement of affairs for Dodge Company on October 31, 2006, in the form
illustrated on page 614.
b. Prepare a working paper to compute the estimated percentage of claims each group
of creditors should expect to receive if Dodge Company petitions for liquidation in
bankruptcy.

(Problem 14.3) Robaire Corporation was in financial difficulty because of declining sales and poor cost
controls. Its stockholders and principal creditors had asked for an estimate of the financial
 Larsen: Modern Advanced IV. Accounting for 14. Bankruptcy: Liquidation © The McGraw−Hill
Accounting, Tenth Edition Fiduciaries and Reorganization Companies, 2005

632 Part Four Accounting for Fiduciaries

CHECK FIGURES results of the realization of the assets, the payment of liabilities, and the liquidation of
b. Estate deficit, Jan. Robaire. Thus, the accountant for Robaire prepared the statement of affairs shown on
31, $9,380; c. Trial page 633.
balance totals, On January 2, 2007, Robaire filed a debtor’s petition for liquidation under the Bank-
$31,850. ruptcy Code. Charles Stern was appointed as trustee by the bankruptcy court to take cus-
tody of the assets, make payments to creditors, and implement an orderly liquidation. The
trustee completed the following transactions and events during January, 2007:
Jan. 2 Recorded the assets and liabilities of Robaire Corporation in a separate set of
accounting records. The assets were recorded at current fair value, and all lia-
bilities were recorded at the estimated amounts payable to the various groups
of creditors.
7 Disposed of the land and buildings at an auction for $52,000 cash and paid
$42,550 to the mortgagee. The payment included interest of $50 that accrued
in January.
10 Made cash payments as follows:

Wages payable $1,500

FICA and income taxes withheld and accrued 800
Completion of inventories 400
Administrative costs of liquidation 600

31 Received cash from Jan. 8 to Jan. 31, 2007, as follows:

Collection of trade accounts receivable at carrying amount,

including $10,000 of assigned accounts $17,500
Sale of inventories 18,000
Disposal of Public Service Company bonds 920

31 Made additional cash payments as follows:

Administrative costs of liquidation $ 1,250

Note payable to bank (from proceeds of collection of assigned
accounts receivable) 10,000
Fifty cents on the dollar to unsecured creditors 30,500

Instructions
a. Prepare journal entries for the foregoing events and transactions of the trustee for
Robaire Corporation.
b. Prepare a statement of realization and liquidation for the trustee of Robaire Corporation
for the month of January 2007. Use the format illustrated on page 617.
c. Prepare a trial balance for the trustee of Robaire Corporation on January 31, 2007.
 ROBAIRE COMPANY
Statement of Affairs
December 31, 2006
Accounting, Tenth Edition

Current Estimated Loss or

Larsen: Modern Advanced

Carrying Fair Amount (Gain) on Carrying Liabilities and Amount

Amounts Assets Values Available Realization Amounts Stockholders’ Equity Unsecured

Assets Pledged for Fully Secured Unsecured Liabilities with Priority:

Fiduciaries

Liabilities: Estimated administrative

$ 4,000 Land $20,000 $(16,000) costs $ 3,200
IV. Accounting for

25,000 Buildings 30,000 (5,000) $ 1,500 Wages payable 1,500

Total $50,000 800 FICA and income taxes
Less: Fully secured liabilities (contra) 42,500 $ 7,500 withheld and accrued 800
Total (deducted contra) $ 5,500
Assets Pledged for Partially Secured
Liabilities: Fully Secured Liabilities:
10,000 Trade accounts receivable 42,000 Mortgage note payable $42,000
(deducted contra) $10,000 500 Interest payable 500
and Reorganization

Total (deducted contra) $42,500

Free Assets:
14. Bankruptcy: Liquidation

700 Cash $ 700 700 Partially Secured Liabilities:

10,450 Trade accounts receivable 10,450 10,450 25,000 Notes payable to bank $25,000
40,000 Inventories $19,350 Less: Assigned trade
Less: Cost to complete 400 18,950 18,950 21,050 accounts receivable 10,000 $ 15,000
9,100 Factory supplies -0- -0- 9,100
5,750 Public Service Company bonds 900 900 4,850 Unsecured Liabilities without
38,000 Machinery and equipment 18,000 18,000 20,000 Priority:
Total estimated amount available $56,500 $ 34,000 20,000 Notes payable to suppliers 20,000
Less: Unsecured liabilities with priority 26,000 Trade accounts payable 26,000
(contra) 5,500 27,200 Stockholders’ equity
Estimated amount available for
unsecured, nonpriority creditors $51,000
Companies, 2005

Estimated deficiency to unsecured,

© The McGraw−Hill

nonpriority creditors 10,000

$143,000 $61,000 $143,000 $61,000
Chapter 14 Bankruptcy: Liquidation and Reorganization 633
 Larsen: Modern Advanced IV. Accounting for 14. Bankruptcy: Liquidation © The McGraw−Hill
Accounting, Tenth Edition Fiduciaries and Reorganization Companies, 2005

634 Part Four Accounting for Fiduciaries

(Problem 14.4) Javits Corporation advised you that it is facing bankruptcy proceedings. As the independent
auditor for Javits, you knew of its financial condition.
The unaudited balance sheet of Javits on July 10, 2006, was as follows:

CHECK FIGURE JAVITS CORPORATION

b. Estimated
Balance Sheet
deficiency, $22,500. July 10, 2006

Assets
Cash $ 12,000
Short-term investments, at cost 20,000
Trade accounts receivable, less allowance for doubtful accounts 90,000
Finished goods inventory 60,000
Material inventory 40,000
Short-term prepayments 5,000
Land 13,000
Buildings (net) 90,000
Machinery (net) 120,000
Goodwill (net) 20,000
Total assets $470,000
Liabilities and Stockholders’ Equity
Notes payable to banks $135,000
Trade accounts payable 94,200
Wages payable 15,000
Mortgage notes payable 130,000
Common stock 100,000
Retained earnings (deficit) (4,200)
Total liabilities and stockholders’ equity $470,000

Additional Information
1. Cash included a $500 travel advance that had been spent.
2. Trade accounts receivable of $40,000 had been pledged as collateral for notes payable
to banks in the amount of $30,000. Credit balances of $5,000 were netted in the ac-
counts receivable total. All accounts were expected to be collected except those for
which an allowance had been established.
3. Short-term investments (all acquired in May 2006), classified as trading, consisted
of U.S. government bonds costing $10,000 and 500 shares of Owens Company
common stock. The current fair value of the bonds was $10,000; the current fair
value of the stock was $18 a share. The bonds had accrued interest receivable of
$200. The short-term investments had been pledged as collateral for a $20,000 note
payable to bank.
4. Estimated realizable value of finished goods was $50,000 and of material was $30,000.
For additional out-of-pocket costs of $10,000 the material would realize $59,900 as
finished goods.
5. Short-term prepayments were expected to be consumed during the liquidation period.
6. The current fair values of plant assets were as follows: land, $25,000; buildings,
$110,000; impaired machinery, $65,000.
Larsen: Modern Advanced IV. Accounting for 14. Bankruptcy: Liquidation © The McGraw−Hill
Accounting, Tenth Edition Fiduciaries and Reorganization Companies, 2005

Chapter 14 Bankruptcy: Liquidation and Reorganization 635

7. Trade accounts payable included $15,000 withheld FICA and income taxes and $6,000
payable to creditors who had been reassured by the president of Javits that they would
be paid. There were unrecorded employer’s FICA taxes in the amount of $500.
8. Wages payable were not subject to any limitations under the Bankruptcy Code.
9. Mortgage notes payable consisted of $100,000 secured by land and buildings, and a
$30,000 installment contract secured by machinery. Total unrecorded accrued interest
for these liabilities amounted to $2,400.
10. Probable judgment on a pending suit against Javits was estimated at $50,000.
11. Costs other than accounting fees to be incurred in connection with the liquidation were
estimated at $10,000.
12. You had not submitted an invoice for $5,000 for the April 30, 2006, annual audit of
Javits, and you estimate a $1,000 fee for liquidation work.
Instructions
a. Prepare correcting journal entries for Javits Corporation on July 10, 2006.
b. Prepare a statement of affairs for Javits Corporation on July 10, 2006. Amounts in the
statement should reflect the journal entries in a.

(Problem 14.5) The adjusted trial balance of Laurel Company on June 30, 2006, is as follows:

CHECK FIGURE
LAUREL COMPANY
Estimated deficiency,
Adjusted Trial Balance
$32,400.
June 30, 2006

Debit Credit
Cash $ 14,135
Notes receivable 29,000
Interest receivable 615
Trade accounts receivable 24,500
Allowance for doubtful accounts $ 800
Inventories 48,000
Land 10,000
Building 50,000
Accumulated depreciation of building 15,000
Machinery and equipment 33,000
Accumulated depreciation of machinery and equipment 19,000
Furniture and fixtures 21,000
Accumulated depreciation of furniture and fixtures 9,500
Goodwill 9,600
Note payable to City Bank 18,000
Notes payable to Municipal Trust Company 6,000
Notes payable to suppliers 24,000
Interest payable on notes 1,280
Trade accounts payable 80,520
Wages payable 1,400
FICA and income taxes withheld and accrued 430
Mortgage bonds payable 32,000
Interest payable on mortgage bonds 1,820
Common stock 70,000
Retained earnings—deficit 39,900
Totals $279,750 $279,750
 Larsen: Modern Advanced IV. Accounting for 14. Bankruptcy: Liquidation © The McGraw−Hill
Accounting, Tenth Edition Fiduciaries and Reorganization Companies, 2005

636 Part Four Accounting for Fiduciaries

Additional Information
1. Notes receivable of $25,000 were pledged to collateralize the $18,000 note payable to
City Bank. Interest of $500 was accrued on the pledged notes receivable, and interest of
$600 was accrued on the $18,000 note payable to the bank. All the pledged notes re-
ceivable were considered collectible. Of the remaining notes receivable, a $1,000 non-
interest-bearing note was uncollectible. The note had been received for an unconditional
cash loan.
2. Trade accounts receivable included $7,000 from Boren Company, which currently was
being liquidated. Creditors were expected to realize 40 cents on the dollar. The al-
lowance for doubtful accounts was adequate to cover any other uncollectible accounts.
A total of $3,200 of the remaining collectible trade accounts receivable was pledged as
collateral for the notes payable to Municipal Trust Company of $6,000 with accrued in-
terest of $180 on June 30, 2006.
3. Inventories, valued at first-in, first-out cost, were expected to realize 25% of cost on a
forced liquidation sale after the write-off of $10,000 of obsolete stock.
4. Land and buildings, which had been appraised at 110% of their carrying amount, were
mortgaged as collateral for the bonds. Interest of $1,820 was accrued on the bonds on
June 30, 2006. Laurel expected to realize 20% of the cost of its impaired machinery and
equipment, and 50% of the cost of its impaired furniture and fixtures after incurring re-
finishing costs of $800.
5. Estimated costs of liquidation were $4,500. Depreciation and accruals had been adjusted
to June 30, 2006.
6. Laurel had net operating loss carryovers for income tax purposes of $22,000 for
the year ended June 30, 2005, and $28,000 for the year ended June 30, 2006. The
income tax rate expected to be in effect when the operating loss carryovers were used
was 40%.

Instructions
Prepare a statement of affairs for Laurel Company on June 30, 2006.
(Problem 14.6) Bilbo Corporation, which is in bankruptcy reorganization, had $105,000 of dividends in ar-
rears on its 7% cumulative preferred stock on March 31, 2006. While retained earnings were
adequate to permit the payment of accumulated dividends, Bilbo’s management did not
CHECK FIGURE want to weaken its working capital position. It also realized that a portion of the plant as-
b. Total assets, sets was no longer used by Bilbo. Therefore, management proposed the following plan of
$1,137,530. reorganization, which was accepted by stockholders and confirmed by the bankruptcy
court, to be effective on April 1, 2006:

1. The preferred stock was to be exchanged for $300,000 face amount and current fair
value of 15%, ten-year bonds. Dividends in arrears were to be settled by the issuance of
12,000 shares of $10 par, 15%, noncumulative preferred stock having a current fair
value equal to par.
2. Common stock was to be assigned a par of $50 a share.
3. Impaired goodwill was to be written off; impaired plant assets were to be written
down, based on appraisal and estimates of current fair value, by a total of $103,200,
consisting of a $85,400 increase in the Accumulated Depreciation ledger account bal-
ance and a $17,800 decrease in plant assets; other current assets were to be written
down by $10,460 to reduce trade accounts receivable and inventories to net realizable
values.
Larsen: Modern Advanced IV. Accounting for 14. Bankruptcy: Liquidation © The McGraw−Hill
Accounting, Tenth Edition Fiduciaries and Reorganization Companies, 2005

Chapter 14 Bankruptcy: Liquidation and Reorganization 637

The balance sheet of Bilbo Corporation on March 31, 2006, follows:

BILBO CORPORATION
Balance Sheet
March 31, 2006

Assets
Cash $ 30,000
Other current assets 252,890
Plant assets $1,458,250
Less: Accumulated depreciation 512,000 946,250
Goodwill 50,000
Total assets $1,279,140

Liabilities and Stockholders’ Equity

Current liabilities $ 132,170
7% cumulative preferred stock, $100 par ($105,000
dividends in arrears); 3,000 shares authorized, issued,
and outstanding 300,000
Common stock, no par or stated value; 9,000 shares
authorized, issued, and outstanding 648,430
Additional paid-in capital: preferred stock 22,470
Retained earnings 176,070
Total liabilities & stockholders’ equity $1,279,140

Instructions
a. Prepare journal entries for Bilbo Corporation to give effect to the plan of reorganization
on April 1, 2006.
b. Prepare a balance sheet for Bilbo Corporation on April 30, 2006, assuming that net
income for April was $15,000. The operations resulted in $11,970 increase in cash,
$18,700 increase in other current assets, $7,050 increase in current liabilities, and
$8,620 increase in the Accumulated Depreciation ledger account.