10 Jan Common Stock 140,000

Module 8 exam 4

Question 1 Dan and Ellie share partnership profits and losses at 70% and 30%, respectively. The partners agree to admit Fran into the partnership for a 50% interest in capital and earnings. Capital accounts immediately before the admission of Fran are:

Dan (70%) $ 800,000

Ellie (30%) 400,000

Total $ 1,200,000

Part 1: Prepare the journal entry(s) for the admission of Fran to the partnership, assuming Fran invested $800,000 for the ownership interest and that this is a fair price for that share of the partnership to be acquired. Fran paid the money directly to Dan and to Ellie for 50% of each of their respective capital interests. The partnership records goodwill.

Part 2: Prepare the journal entry(s) for the admission of Fran to the partnership, assuming Fran invested $1,000,000 for the ownership interest. Fran paid the money to the partnership for a 50% interest in capital and earnings. Assume the valuation is based on the capital of the current partnership, which is fairly valued. The partnership records goodwill.

Part 3: Prepare the journal entry(s) for the admission of Fran to the partnership, assuming Fran invested $1,400,000 for the ownership interest and that this is a fair price for that share of the partnership to be acquired. Fran paid the money to the partnership for a 50% interest in capital and earnings. The partnership records goodwill.

Question 2

Adam, Bella, and Chris operate a partnership with a complex profit and loss sharing agreement. The average capital balance for Adam, Bella and Chris on December 31, 2014 is $120,000, $270,000, and $340,000, respectively. A 6% interest allocation is provided to each partner based on the average capital balance on December 31, 2014. Adam and Bella receive salary allocations of $40,000 and $50,000, respectively. If partnership net income is above $160,000 after the salary allocations are considered (but before the interest allocations are considered), Chris will receive a bonus of 10% of the income (pre-salary and interest, but net of the bonus). All residual income is allocated in the ratios of 2:2:6 to Adam, Bella, and Chris, respectively.

Part 1: Prepare a schedule to allocate income to the partners, assuming that the partnership net income for 2014 is $330,000.

Part 2: Prepare a journal entry to distribute the partnership’s income to the partners (assume that an Income Summary account is used by the partnership).

Question 3

The balance sheet of the Addy, Bess, and Clara partnership on January 1, 2014 (the date of partnership dissolution) was as follows:

Cash $ 4,000 Liabilities $ 8,000

Other assets 26,000 Loan from Addy 1,000

Loan to Clara 2,000 Addy, capital (20%) 2,000

Bess, capital (40%) 9,000

Clara, capital (40%) 12,000

Total assets $ 32,000 Total liab./equity $ 32,000

In January, other assets with a book value of $16,000 were sold for $10,000 in cash.

Determine how the available cash on January 31, 2014 will be distributed. (Use a safe payments schedule.)

Question 4

Alitech Corporation is liquidating under Chapter 7 of the Bankruptcy Act. The accounts of Alitech at the time of filing are summarized as follows:

Estimated

Realizable

Book Value Value

Cash $ 10,000 $ 10,000

Accounts receivable-net 60,000 50,000

Inventory 110,000 65,000

Land 20,000 35,000

Building 200,000 126,000

Goodwill 22,000

$ 422,000

Accounts payable $ 120,000

Wages and salaries 30,000

Taxes payable 80,000

Accrued mortgage interest payable 22,000

Mortgage payable 100,000

Capital stock 90,000

Deficit (20,000)

$ 422,000

The land and building are pledged as security for the mortgage payable as well as any accrued interest on the mortgage. Wages and salaries were earned within 90 days of filing the petition for bankruptcy and do not exceed $10,000 per employee. Liquidation expenses are expected to be $30,000.

Part 1: Prepare a schedule showing the priority rankings of the creditors and the expected payouts.

Part 2: Billing Corporation was a supplier to Alitech Corporation, and at the time of Alitech’s bankruptcy filing, Billing’s account receivable from Alitech was $40,000. On the basis of the estimates, how much can Billing expect to receive?

Question 5 Kline Corporation incurred major losses in 2014 and entered into voluntary Chapter 7 bankruptcy in the early part of 2015. By July 1, all assets were converted into cash, the secured creditors were paid, and $122,700 in cash was left to pay the remaining claims as follows:

Accounts payable $ 37,000

Claims incurred between the date of filing an involuntary 5,000

petition and the date an interim trustee is appointed

Property taxes payable 8,000

Wages payable (all under $10,000 per employee; 74,000

earned within 90 days of filing bankruptcy petition)

Unsecured note payable 19,000

Accrued interest on the note payable 2,000

Administrative expenses of the trustee 12,180

Total $ 157,180

Classify the claims by their Chapter 7 priority ranking, and analyze which amounts will be paid and which amounts will be written off.

Question 6

Hilfmir Corporation filed for Chapter 11 bankruptcy on January 1, 2014. A summary of their financial status is shown below on June 30, 2014, at the date of the approved reorganization, along with the fair value of their assets.

Per Books Fair Value

Cash $ 134,000 $ 134,000

A/R – net 20,000 20,000

Inventory 32,000 40,000

Plant Assets – net 114,000 106,000

Patent 80,000 0

$ 380,000

A/P $ 60,000

Wages Payable 20,000

Prepetition liab. 250,000

Common Stock 140,000

Deficit (90,000)

$ 380,000

Under the reorganization plan, the reorganization value has been set at $320,000. Prepetition liabilities include $30,000 of trade Accounts Payable and a $220,000 Note Payable to Bigg Bank. The reorganization plan calls for the Prepetition accounts payable to be paid at 80% at a later date, and the Note Payable for $220,000 to be replaced by a Note Payable for $76,000 and the issuance of common stock of the new entity for $100,000. The former stockholders will receive $40,000 in common stock of the new entity, Hilfmir, in exchange for their shares.

Show the calculations to determine if Hilfmir is eligible for fresh-start accounting, and prepare a fresh-start balance sheet for the new entity, Hilfmir, as of July 1, 2014.