Jake, a Businessman, Filed for Bankruptcy and Was Declared Insolvent

question 14

Multiple Choice

Jake, a businessman, filed for bankruptcy and was declared insolvent by the courts. He owed $15,000 each to two creditors and $5,000 each to two others. The courts also decreed that he should sell his house worth $30,000, to pay his debts. Which of the following is legally permissible in this scenario?

• A)After selling his house, Jake will pay the creditors on a pro-rata basis.
• B)After selling his house, Jake will pay whomsoever he chooses.
• C)After selling his house, Jake will pay the creditors he to which owes the maximum amount of money.
• D)After selling his house, Jake will pay the creditors to which he owes the least amount of money.

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Definitions:

LIFO Liquidations

The process of using older inventory costs in the cost of goods sold, which can artificially increase profit margins during times of inflation but can also lead to inventory shortages.

Operating Segment

A component of a business that engages in business activities from which it may earn revenues and incur expenses, and for which separate financial information is available.

U.S. GAAP

United States Generally Accepted Accounting Principles, a set of rules and guidelines meant to ensure financial reporting consistency and transparency.

Geographic Segment

A part of a business that operates in a specific geographical area that is significant enough to require separate financial reporting.