Use the following information in answering questions 1 and 2:

Hal Company filed for protection from creditors under Chapter 11 of the bankruptcy act on July 1, 2011. Hal had the following liabilities at the time of filing:

 10% mortgage bonds payable, secured by a building

with a book value and fair value of $100,000……………………  $200,000

Accrued interest on mortgage (January 1–July 1) ………………      10,000

Accounts payable ………………………………………………………..……       80,000

Priority tax claims ……………………………………………………..………  50,000

                                                                                                         $340,000

1. The December 31, 2011, balance sheet will show prepetition liabilities of:

a. $340,000 (the claims at filing)

b. $240,000 (the original claims less the secured portion of the mortgage bonds)

c. $350,000 (the original claims plus six months’ interest on the bonds)

d. $290,000 (the original claims less the priority tax claims)

2. Two and a half years after filing the petition for bankruptcy, Hal’s management, its creditors, the equity holders, and other parties in interest agree on a reorganization value of $500,000. Which of the following statements is most likely?

a. The reorganization value approximates the appraised value of the firm as a going concern less the prepetition liabilities.

b. The reorganization value approximates the fair value of the assets less the fair value of the prepetition and post-petition liabilities.

c. The reorganization value approximates the fair value of the assets less the book value of the post-petition liabilities and the estimated settlement value of the prepetition liabilities.

d. The reorganization value approximates the fair value of the entity without considering the liabilities.

3. Uni, a parent company with five wholly owned operating subsidiaries, is in the process of preparing consolidated financial statements for the year. Two of Uni’s subsidiaries are operating as debtors in possession under Chapter

11 of the bankruptcy act. Which of the following statements is correct?

a. ASC Topic 810, “Consolidation,” prohibits Uni from consolidating the financial statements of the two subsidiaries in bankruptcy with those of the other affiliated companies.

b. ASC Topic 810, “Consolidation,” requires that the financial statements of all five of the subsidiaries be consolidated with those of the parent company.

c. If Uni’s consolidated financial statements include the operations of the two subsidiaries in bankruptcy, ASC Topic 852 requires that condensed combined financial statements for all entities in reorganization be presented as supplementary financial statements.

d. If Uni’s consolidated financial statements do not include the operations of the two subsidiaries in bankruptcy, those subsidiaries must be accounted for under the cost method.

4. When fresh-start reporting is used, the initial financial statement disclosures should not include:

a. Adjustments made in the amounts of individual assets and liabilities

b. The amount of debt forgiven

c. The amount of prior retained earnings or deficit eliminated

d. Current and prior-year EPS amounts