Select the best answer for each of the following:
1. Johnson joined other creditors of Alpha Company in a composition agreement seeking to avoid the necessity of a bankruptcy proceeding against Alpha. Which statement describes the composition agreement?
(a) It provides that the creditors will receive less than the full amount of their claims.
(b) It provides a temporary delay, not to exceed six months, insofar as the debtor's obligation to repay the debts included in the composition is concerned.
(c) It must be approved by all creditors.
(d) It provides for the appointment of a receiver to take over and operate the debtor's business.
2. Freeman Company ceased doing business and is in bankruptcy. Among the claimants are employees seeking unpaid wages. The following statements describe the possible status of such claims in a bankruptcy proceeding or legal limitations placed upon them. Which one is an incorrect statement?
(a) The amounts of excess wages not entitled to a priority are mere unsecured claims.
(b) Such claims include wages earned within 180 days before the filing of the bankruptcy petition, but not to exceed $4,650 in amount.
(c) Such claims are entitled to priority.
(d) If a priority is afforded such claims, it cannot exceed $4,650 per wage earner.
3. Which of the entities listed is not subject to an involuntary bankruptcy petition? (a) A municipality.
(b) A partnership.
(c) A wholesaler company.
(d) A retailing corporation.
4. The highest priority for payment of unsecured claims in a bankruptcy proceeding is:
(a) Wages up to $4,650 earned within three months before the petition.
(b) Unpaid federal income taxes.
(c) Administrative expenses of the bankruptcy.
(d) Wages owed to an insolvent employee.
5. Which of the following situations that arise because of a debtor's financial difficulties and would not otherwise be acceptable to the creditor must be accounted for as a troubled debt restructuring?
(a) As part of a negotiated settlement designed to maintain a relationship with a debtor, a creditor reduces the effective interest rate on debt outstanding to reflect the lower market interest rate currently applicable to debt of that risk class.
(b) Because of a court order, a creditor reduces the stated interest rate for the remaining original life of the debt.
(c) Because of a court order, a creditor accepts as full satisfaction of its receivable a building the fair value of which equals the creditor's recorded investment in the receivable.
(d) As part of a negotiated settlement, a creditor accepts as full satisfaction of its receivable a building the fair value of which equals the debtor's carrying amount of the payable.