Question

In: Accounting

1.What is defined as a condition in which a company is unable to meet debts as the debts mature?

Multiple Choice Questions

1.What is defined as a condition in which a company is unable to meet debts as the debts mature?

A.Deficit

B.Liability

C.Insolvency

D.Credit squeeze

2.Under a composition agreement,

A.creditors agree to accept less than the face amount of their claims.

B.debtors in financial difficulty transfer assets "without recourse."

C.a creditors' committee is initiated with a plan of settlement proposed by the debtor.

D.the debtor petitions for relief in a bankruptcy court.

3.In which of the following ways can debt be restructured?
I. Assets can be transferred to the creditor.
II. An equity interest can be granted to the creditor.
III. The terms of the debt can be modified.

A.I and II only

B.I and III only

C.II and III only

D.I, II, and III

4.Under which nonjudicial action do creditors agree to assist the debtor in managing the most efficient payment of creditors' claims?

A.Debt restructuring arrangement

B.Creditors' committee management

C.Transfer of assets

D.Composition agreement

5.A transfer of assets by a company in financial difficulty is considered a sale if:
I. the transfer includes a recourse provision allowing the buyer to return the asset.
II. the transferee obtains the right to pledge or exchange the transferred assets.
III. the transferred assets have been isolated from the transferor.
IV. the transferor does not maintain effective control over the transferred assets.

A.I, II, and IV

B.Both I and III

C.Both I and II

D.II, III, and IV

6.The Bankruptcy Reform Act contains chapters which deal with:
I. Individuals.
II. Corporations.
III. Municipal governments.

A.Only I and II

B.Only II and III

C.Only I and III

D.I, II, and III

7.A debtor may file which type of petition when seeking judicial protection under the Bankruptcy Reform Act?
I. Voluntary
II. Involuntary

A.I only

B.II only

C.Either I or II.

D.Neither I nor II

8.Creditors may file which type of petition when seeking remedy under the Bankruptcy Code?
I. Voluntary
II. Involuntary

A.I only

B.II only

C.Either I or II

D.Neither I nor II

9.Under the Bankruptcy Code, an insolvent corporation may be:
I. Reorganized.
II. Liquidated.

A.I

B.II

C.Either I or II

D.Neither I nor II

10.Which chapters of the Bankruptcy Code deal with corporations?

A.Chapters 1, 3, and 5

B.Chapter 9

C.Chapters 7 and 11

D.Chapters 12 and 13

Solutions

Expert Solution

1.. Option C i.e., Insolvency

         Insolvency is a situation where a company or an individual is unable to pay off the obligations/ debts  arising as the debts mature.There are many reasons which can make an individual or the company as insolvent like lack of skills in staff , Law suits , unable to meet customer requirements , heavy production cost or finance cost etc..Insolvent firms  mostly have the assets to pay off their liabilies  for which they need  an arrangement with the creditors .They have a legal option available  i.e., They can file for bankruptcy protection , which is a court order where  nominee  is appointed by a court for liquidation of the Assets.

2. Option  A   i.e., creditors agree to accept less than the face amount of their claims.

        A composition agreement is an agreement between the Insolvent debtor  and the creditors  that the creditors entering into an agreement will be paid the proportionate amount of their claim and not their full claims.Through this agreement the debtor should pay the realized amount  after liquidation  to every creditor as per the agreement .The composition agreement consists of the amount payable after reducing creditors actual claim and the time of payment .A composition agreement is beneficial to the insolvent debtors.

3.Option D i.e, All the above

    Debt can be restructured in all  the circumstances mentioned as options.

         A)Assets can be transferred to the creditor .When the company is unable to meet their liabilities payable to creditors , then they can transfer thier assets whose fair value is equal to the                     liability payable.If transferring assets value is higher than the debt payable then it  will lead to loss on transfer of asset to the organization.

           B) The firms can even issue equity shares to the creditors for their claim settlement.The option is available to the creditor whether to receive cash or Equity shares.

         C) The Debt payable terms can be modified . Rate of interest , maturity period can be changed .

4.Option B i.e., Creditor's committee management.

            The Debtor and Creditors can make an arrangement that the creditors will sell the assets available and the amount realized will be used to pay off all the liabilities of the firm.Its a non                 judicial agreement between them .This kind of agreement are common in case of liquidation of companies.

5. Option D  I.e, 2,3,and 4

                   A transfer of assets by a company in financial difficulty is considered as a  sale if  the control of the asset have been fully trasnferred to the transferee. Once ownership transferred                        the asset is considered to be sold .Certain situations when asset transferred is considered as sale are 

                          A ) the transferee obtains the right to pledge or exchange the transferred assets.
                          B)  the transferred assets have been isolated from the transferor.
                          C)  the transferor does not maintain effective control over the transferred assets  

6. Option D.

             The Bankruptcy Reform Act contains chapters which deals with Individuals , Corporations and Municipal Governments.

7. Option A    Only voluntary

           A debtor may file VOLUNTARY  type of petition when seeking judicial protection under the Bankruptcy Reform Act. A debtor can even do this if he is solvent if he has high liabilities             to pay off . The debtor should report  accurate information about every debt outstanding which he is liable to pay.If there is any additional income which he gets should also be reported

                    It is in the hands of court to accept the petition or dismiss the petition. 

8. Option -B    only involuntary

         Creditors may file involuntary type of petition when seeking remedy under the Bankruptcy Code. This type of situation arises when it is clearly that the debtor will not be able to pay                 the liabilities to the creditor.The information regarding the debts should be accurate . The debtor  will be given a chance to prove himself  and make the dismissal of the petition made                 by the creditor .

9. Option C  i.e, Either 1 or 2

          Under the Bankruptcy Code, an insolvent corporation may be either reorganize or liquidate . Reorganization is the only option provided by Bankruptcy code under chapter 11.It means that the debtor can continue the business after reorganization.

10.Option C 

     Chapter 7 and chapter 11 of the Bankruptcy code deal with corporations.


1.. Option C i.e., Insolvency

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