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33. A "debtor-in-possession" balance sheet is prepared for a company which:
A. is having its debts restructured.
B. is undergoing a liquidation under Chapter 7.
C. is undergoing a reorganization under Chapter 11.
D. is in bankruptcy reorganization but management still controls the company.

34. A debtor-in-possession balance sheet should report:
I. Liabilities not subject to compromise.
II. Liabilities subject to compromise.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

35. On a debtor-in-possession income statement, which of the following items should be reported under the heading "Reorganization Items"?
A. Sales
B. Selling expenses
C. Income tax benefit
D. Loss on disposal of assets

Essay Questions

36. What are the conditions necessary for using fresh start reporting in reorganization?

37. Wilbur Corporation is to be liquidated under Chapter 7 of the Bankruptcy Code. The balance sheet on December 31, 2008, is as follows:


The following additional information is available:

1. Marketable securities consist of 2,000 shares of Bristol Inc. common stock. The market value per share of the stock is $8. The stock was pledged against a $20,000, 8 percent note payable that has accrued interest of $800.
2. Accounts receivable of $40,000 are collateral for a $35,000, 10 percent note payable that has accrued interest of $3,500.
3. Inventory with a book value of $35,000 and a current value of $32,000 is pledged against accounts payable of $60,000. The appraised value of the remainder of the inventory is $50,000.
4. Only $1,000 will be recovered from prepaid insurance.
5. Land is appraised at $65,000 and plant and equipment at $160,000.
6. It is estimated that the franchises can be sold for $15,000.
7. All the wages payable qualify for priority.
8. The mortgages are on the land and on a building with a book value of $110,000 and an appraised value of $100,000. The accrued interest on the mortgages is $7,500.
9. Estimated legal and accounting fees for the liquidation are $10,000.

Required
a. Prepare a statement of affairs as of December 31, 2008.
b. Compute the estimated percentage settlement to unsecured creditors.

38. A trustee has been appointed for Smith Company, which is being liquidated under Chapter 7 of the Bankruptcy Code. The following transactions occurred after the assets were transferred to the trustee:

1. Credit sales by the trustee were $100,000. Cost of goods sold were $72,000, consisting of all the inventory transferred from Smith.
2. The trustee sold all $20,000 worth of marketable securities for $15,000.
3. Receivables collected by the trustee:
Old: $28,000 of the $50,000 transferred
New: $65,000
4. Disbursements by the trustee:
Old current payables: $31,000 of the $65,000 transferred
Trustee's expenses: $6,000
5. Recorded $24,000 depreciation on the plant assets of $120,000 transferred from Smith.

Required:
Prepare a statement of realization and liquidation according to the traditional approach illustrated in the chapter.

39. Briefly explain the three classes of creditors specified in the Bankruptcy Code.

40. To obtain cash quickly, DebCo. sold $750,000 of its receivables to Finco., with recourse. As the accountant for DebCo., what issues do you need to resolve in order to determine the appropriate accounting treatment?