Distribution of a Debtors Estate Flashcards
Question #4 (AICPA.950531REG-BL)
Dart Inc., a closely held corporation, is petitioned involuntarily into bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. Dart contests the petition.
Dart has not been paying its business debts as they become due, has defaulted on its mortgage-loan payments, and owes back-taxes to the IRS. The total cash value of Dart’s bankruptcy estate, after the sale of all assets and payment of administration expenses, is $100,000.
Dart has the following creditors:
- Fracon Bank is owed $75,000 principal and accrued interest on a mortgage loan secured by Dart’s real property. The property was valued at and sold, in bankruptcy, for $70,000.
- The IRS has a $12,000 recorded judgment for unpaid corporate income tax.
- JOG Office Supplies has an unsecured claim of $3,000 that was filed in timely fashion.
- Nanstar Electric Co. has an unsecured claim of $1,200 that was not filed in timely fashion.
- Decoy Publications has a claim of $14,000, of which $2,000 is secured by Dart’s inventory that was valued and sold, in bankruptcy, for $2,000. The claim was filed in timely fashion.
Assume that the bankruptcy estate was distributed.
What dollar amount would Nanstar Electric Co. receive?
A. $0
B. $800
C. $1,000
D. $1,200
A. $0
Of the $100,000, the first $70,000 will go to Fracon Bank, as that money was generated by the sale of the house in which they had a security interest. The next $2,000 will similarly go to Decoy as money raised from the sale of their security interest. This leaves $28,000. The next $12,000 will go to the IRS to satisfy their recorded judgment, leaving $16,000. All taxes are paid before general creditors are paid. The final $16,000 is divided pro rata among remaining creditors, since there is not enough to pay all of them in full. However, all general creditors who have filed a claim in a timely fashion must be fully repaid before those who have not filed in a timely fashion are paid anything. Therefore, all cash will be used up before Nanstar collects anything.
Wrong Answer that I chose was
C. $1,000
Of the $100,000, the first $70,000 will go to Fracon Bank, as that money was generated by the sale of the house in which they had a security interest. The next $2,000 will similarly go to Decoy as money raised from the sale of their security interest. This leaves $28,000. The next $12,000 will go to the IRS to satisfy their recorded judgment, leaving $16,000. All taxes are paid before general creditors are paid. The final $16,000 is divided pro rata among remaining creditors, since there is not enough to pay all of them in full. However, all general creditors who have filed a claim in a timely fashion must be fully repaid before those who have not timely filed are paid a dime. Therefore, all cash will be used up before Nanstar collects anything.
Question #5 (AICPA.911145REG-BL)
On February 28, 2005, Master, Inc. has total assets with a fair market value of $1.2mn and total liabilities of $990,000.
On January 15, 2005, Master made a monthly installment-note payment to Acme Distributors Corp., a creditor holding a properly perfected security interest in equipment having a fair market value greater than the balance due on the note.
On March 15, 2005, Master voluntarily files a petition in bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. One year later, the equipment was sold to Acme for less than the balance due on the note .
Which of the following statements correctly describes Acme’s distribution from Master’s bankruptcy estate?
A. Acme will receive the total amount it is owed, even if the proceeds from the sale of the collateral were less than the balance owed by Master.
B. Acme will have the same priority as unsecured general creditors, to the extent that the proceeds from the sale of its collateral are insufficient to satisfy the amount owed by Master.
C. The total proceeds from the sale of the collateral will be paid to Acme, even if they are less than the balance owed by Master, provided there is sufficient cash to pay all administrative costs associated with the bankruptcy.
D. Acme will receive only the proceeds from the sale of the collateral in full satisfaction of the debt owed by Master.
B. Acme will have the same priority as unsecured general creditors, to the extent that the proceeds from the sale of its collateral are insufficient to satisfy the amount owed by Master.
If this sale does not generate enough to cover the entire debt, then Acme becomes a general creditor for that portion of the debt. A perfected secured creditor only has a special priority right to the security interest, or collateral. When the collateral has been disposed of, it must wait in line for further payments with everyone else.
Wrong Answer
A. Acme will receive the total amount it is owed, even if the proceeds from the sale of the collateral were less than the balance owed by Master.
Refer to the correct answer for the complete explanation.
Question #8 (AICPA.901134REG-BL)
On May 24, Knurl, an appliance dealer, files for bankruptcy under the provisions of Chapter 7 of the Federal Bankruptcy Code. A trustee is appointed and an order for relief is entered.
Knurl’s non-exempt property is converted to cash, which is available to satisfy the following claims and expenses:
Claim by Card Corp. (one of Knurl’s suppliers) for toasters ordered on May 11, and delivered on credit to Knurl on May 15. $50,000
Fee earned by the bankruptcy trustee. $12,000
Claim by Hill Co. for the delivery of televisions to Knurl on credit. The televisions were delivered on April 9, and a financing statement was properly filed on April 10. These televisions were sold by the trustee, with Hill’s consent, for $7,000, their fair market value. $7,000
Fees earned by the attorneys for the bankruptcy estate. $8,000
The cash available for distribution includes the proceeds from the sale of the televisions. What amount will be distributed to Card if the cash available for distribution is $50,000?
A. $23,000
B. $30,000
C. $31,000
D. $43,000
A. $23,000
All three of the other claims have a higher priority than the claim of Card. Card is a general creditor and comes last in the pecking order. All superior claims must be paid in full first, and then any leftovers will be paid to Card.
After $50,000 - $12,000 - $7,000 - $8,000, Card will receive only $23,000.
Wrong answer that I selected was
B. $30,000
All three of the other claims have a higher priority than the claim of Card. Card is a general creditor and comes last in the pecking order. All superior claims must be paid in full first, and then any leftovers will be paid to Card.
After $50,000 - $12,000 - $7,000 - $8,000, Card will receive only $23,000.
Question #9 (AICPA.901131REG-BL)
In a voluntary bankruptcy proceeding under Chapter 7 of the Federal Bankruptcy Code, which of the following claims, filed within 90 days of the filing for bankruptcy, will be paid first?
A. Unsecured federal taxes.
B. Utility bills up to $1,000.
C. Voluntary contributions to employee benefit plans.
D. Employee vacation and sick pay up to $2,000 per employee.
D. Employee vacation and sick pay up to $2,000 per employee.
The bankruptcy establishes an order of priority for claims like these. After administrative expenses are paid, unpaid wages earned for 90 days prior to filing of the petition, up to $10,950 per employee, are paid; then, unpaid contributions to employee benefit plans, up to $10,950 per employee, are paid; then, taxes are paid; lastly, utility bills with the general creditors are paid.
Wrong Answer
C. Voluntary contributions to employee benefit plans.
The bankruptcy establishes an order of priority for claims like these. After administrative expenses are paid, unpaid wages earned for 90 days prior to filing of the petition, up to $10,950 per employee, are paid; then, unpaid contributions to employee benefit plans, up to $10,950 per employee, are paid; then, taxes are paid; lastly, utility bills with the general creditors are paid.
